The government’s proposal to link interest rates of small saving schemes with market rates can prove beneficial for mutual funds.
“The Government is examining linking small savings interest rates to market interest rates. These moves should further help transmission of policy rates into lending rates,” said the RBI press release.
Thus, interest rates on small savings products like post office deposits, National Savings Certificate, Public Provident Fund (PPF) and Senior Citizen Savings Scheme may go down.
Currently, interest rates on small saving schemes vary between 8.3% and 9.3%, which is higher than bank deposits. Hemant Rustagi of Wiseinvest Advisiors believes that investors should now shift to market linked products. “Reducing small savings interest rates is a positive move. This should nudge investors to invest in MF fixed income schemes which can offer better returns.”
Bangalore based advisor Srikant Matrubai says that IFAs can ask their clients to move to high yielding debt instruments.
Fund officials feel that if this goes through, it will help mutual funds. Dinesh Khara, MD & CEO, SBI MF says “If the rates are cut, the wisest move will be to switch to bonds which can offer better returns. For risk averse investors, MIP and other debt funds are better suited.”
G Pradeepkumar, CEO, Union KBC Mutual Fund says, “If the small saving rates fall, interest rates on bank deposits will also fall. Consequently, there will be a steady rise in the MF inflows which is a positive sign for the market and the industry.”
