Interest rate cut in small saving schemes may help debt mutual funds

The Ministry of Finance has cut interest rates of small saving schemes by 10 bps or 0.1%. This has come into effect from October 1, 2016.

With this, the interest rates on PPF, Kisan Vikas Patra (KVP) and Sukanya Samriddhi Scheme (SSS) has come down to 8%, 7.7% and 8.5% respectively.

Experts feel that this will make debt funds more attractive.

“Investors who invest in bank FDs and small savings schemes may migrate to debt mutual funds. Going forward, people may also shift their investments to equity mutual funds considering their attractive returns and tax benefits,” said Vikaas M Sachdeva, CEO, Edelweiss Mutual Fund.

Kumaresh Ramakrishanan, Head - Fixed Income, DHFL Pramerica Mutual Fund seconds his view. "People will migrate to debt funds to seek attractive returns. But we have to wait for at least three years to witness this change,” he said.   

Srikanth Matrubai of Srikavi Wealth Advisors believes that an increasing number of people are preferring debt funds over PPF and KVP. He said, “Debt funds have an edge over other fixed income products since they offer tax benefits in the form of indexation. Even if small savings schemes are tax-free in the hands of investors, their returns (post taxation) is much superior in debt mutual funds in the long run.”

However, a few experts have a different opinion. Ritesh Sheth of Tejas Consultancy believes that people who invest in small savings schemes have a different mindset. “Risk averse investors seek security and a difference of a mere 10 bps would not stop them from investing in such schemes,” he said.

Revised rate of interest of small savings schemes

Source: The Ministry of Finance