- Insurance, gold or other assets cannot protect you against emergencies. You need a dedicated fund
- The ability to encash it quickly is the primary quality you should look for while choosing these investments
- Returns and tax efficiency don’t matter
- Stick to breakable FDs with top banks
- 9 months’ expenses are good, but may need tweaks for certain situations
Desperate times call for desperate measures. Therefore, Indian fixed income investors may need to brace for a further plunge in interest rates in the coming months. As COVID-19 takes a destructive toll on global economies, central banks are responding by slashing their interest rates from already abysmal levels. The US Fed Funds rate is now at 0%, the European Central Bank is offering a negative 0.5 % on deposits and the Bank of Japan’s policy rate is at a negative 0.10 %.
In India, pressure is mounting on the RBI to quickly cut the repo rate from 5.15% by a further 0.5 or 1 percentage points. While it isn’t clear yet if it will oblige, given the extraordinary times we live in, we can’t rule out the repo rate falling below its all-time low of 4.75% last seen in April 2009. Interest rates in the market are already reflecting this with the Government of India borrowing 10-year money at 6.23% and 1-year money at about 5%.
Bank deposit rates are tumbling too. With the Yes Bank crisis leading to a flight to safety, leading banks with sound balance sheets are flush with deposits, allowing them to cut their deposit rates to rock-bottom levels. SBI recently slashed its retail term deposit rate to 5.9% for all periods from 1 to 5 years; senior citizens will get 6.4%. It is only a matter of time before other large banks follow suit.
if you already have an emergency fund and are looking for long-term options to park additional surpluses, there’s still one set of schemes that offer the unusual combination of high rates with complete safety.
Despite this, given the likely risks from business shut downs, income losses etc, all investors, at this juncture do need an emergency fund held in the top banks, amounting to 6 months’ expenses to take care of unforeseen events. This should be held in quickly liquidatable FDs.
But if you already have an emergency fund and are looking for long term options to park additional surpluses, there’s still one set of schemes that offer the unusual combination of high rates with complete safety. This window of opportunity may not last long, because the Government too is under pressure to align its rates to markets and may cut interest rates from the period beginning April 1 2020.
We suggest that investors take advantage of this unique opportunity to lock into the following schemes for five years.
For all investors
The small savings schemes offered by India Post reset their interest rates at the beginning of every quarter. For the last three quarters, while market interest rates have tumbled, the government has not changed the rates for small savings schemes. With the current quarter coming to an end on March 31 2020, there are signs that the government may now reduce rates, given that its borrowing costs from the market have fallen much lower. So, if you are looking for options for the debt portion of your money, consider locking into the following schemes for 5 years to make the most of high rates.
National Savings Time Deposit: The Post Office’s term deposit scheme is available for 1, 2, 3 and 5-year tenures and pays out annual interest. Interest rates on these deposits change every quarter. The five-year deposit is particularly attractive with the rate for the current quarter (upto March 31 2020) at 7.7 per cent, a good 1.3 to 1.8 percentage points higher than deposits with the top banks. The minimum investment is Rs 100 and there is no maximum limit. The scheme also offers an 80C exemption for your initial investments upto Rs 1.5 lakh. Interest earned is taxable, but upto Rs 50,000 a year is exempt for senior citizens under section 80 TTB.
National Savings Certificates: If you don’t need regular income and can let your interest compound, National Savings Certificates (VIII issue) are a good choice, currently offering 7.9% pa. They are available in minimum denomination of Rs 1000 with multiples of Rs 100. There’s no maximum limit on how much can be parked in these instruments. The certificates have a 5-year term. Interest accrues annually but is deemed to be reinvested in the scheme. At the end of five years, the accumulated amount is paid to the holder. Initial investment fetches a tax exemption upto Rs 1.5 lakh under section 80C. The interest is taxable. But as it is deemed to be reinvested in the scheme every year, if you have room under section 80C, the reinvested interest can qualify for section 80C benefits.
National Savings Monthly Income Account (earlier POMIS): This scheme from India Post, is open to investors of all ages but caps the total investment at Rs 4.5 lakh for individual accounts and Rs 9 lakh for joint accounts. Interest rates are reset every quarter with the current rate at 7.6 per cent. The interest on this scheme is paid out monthly. It is a 5-year scheme, which offers premature exit after 1 year at a penalty of 2 per cent. There’s no section 80C benefit; interest received does not suffer TDS but is taxable.
SCSS should be the top choice for any senior looking for safe regular income options today.
For senior citizens
The following schemes are available for senior citizens over 60 alone.
Senior Citizen’s Savings Scheme (SCSS): SCSS should be the top choice for any senior looking for safe regular income options today. The interest rate for this quarter is 8.6 per cent per annum, a good 1.8 to 2 percentage points higher than rates from top banks. It accepts a minimum of Rs 1000 and a maximum of Rs 15 lakh in an individual’s name. It is a 5-year scheme with interest pay outs at quarterly intervals. It allows early exit with a penalty of 1.5 per cent after one year. The initial investment is eligible for tax exemptions under section 80C upto Rs 1.5 lakh. Interest earned is taxable, but upto Rs 50,000 a year is exempt for senior citizens under section 80 TTB.
Pradhan Mantri Vaya Vandana Yojana: This is a scheme offered by the LIC which offers a guaranteed pension to senior citizens against lumpsum upfront investments made by them. Investors who are 60 years old or above can invest upto Rs 15 lakh. On payment of the upfront amount, the scheme pays out a monthly, quarterly, half yearly or annual pension based on the investor’s choice for the next 10 years. The pension rates vary based on the frequency chosen, from 8.3% per annum for annual payouts to 8% on monthly payouts. The scheme also offers insurance cover for the investor equal to the initial investment during the 10-year period. On the completion of 10 years, the initial investment is returned. This scheme is open only until March 31 2020.
Act quickly to lock into the above returns before March 31.