Mutual Fund Application Forms Download Any Applications
Invest in Tax Saving Mutual Funds Invest Online
Infrastructure Bond Application Forms Download Applications

Friday, February 14, 2014

Urjit Patel committee recommendations - Small saving schemes could lose Interest

Download Tax Saving Mutual Fund Application Forms

Invest In Tax Saving Mutual Funds Online

Buy Gold Mutual Funds

Leave a missed Call on

94 8300 8300

 

 


Urjit Patel committee recommends resetting the rates more frequently. That might make these much less attractive
 

Many investors are flocking back to small saving schemes as investors seek the safety of government instruments. With a host of ponzi schemes going under and taking thousands of crores of investors' money, people have again begun to warm up to instruments such as post office time deposits and National Savings Certificates ( NSCs).

In 2013- 14, collections from small savings schemes are back into positive territory.

Before that, collections in these were losing to other investments such as fixed deposits (FDs) and fixed maturity plans. In 2011- 12, for instance, there was a gross negative outflow of 21,800 crore from all government saving schemes, show reports from the Reserve Bank of India. In 2012- 13, these outflows shrunk to 9,400 crore.

Inflows this financial year are expected to be in positive territory, at around 1,100 crore.

Experts say investors are revisiting these schemes because they don't want to take market risks. There are different kinds of investors and some don't want to take risk. For a majority of investors in India, there's the risk of losing capital. Definitely, small saving schemes have a place in the portfolio. Even while current yields from small saving schemes are not that attractive, the safety factor is largely attracting more of people in the lower tax bracket. In some cases, these are better than bank deposits but the returns do not match consumer price inflation. For instance a one- year time deposit earns 8.2 per cent interest per annum, as compared to around eight per cent for FDs. Consumer price inflation is currently 9.67 per cent. Experts say while investors are getting a better rate, the risk of losing capital to inflation is not captured in these schemes.

The popular NSCs offer 8.5 per cent returns to investors and come with a lock- in of five years.

However, for a large number of investors, the trusted old savings could undergo a sea change if the Urjit Patel committee report on monetary policy is implemented. Interest rates on small savings have been changed infrequently in the past. The previous revision was on April 1, 2013, when the rates were cut by 10 basis points. The Patel committee says with these infrequent changes, small savings had acquired a competitive edge over bank deposits during the easing of monetary policy, as evident during 2009- 10. In other words, when the Reserve Bank of India was cutting interest rates, small saving schemes were turning attractive for investors due to their higher return.

The report says annual resets for small saving rates continue to provide these a competitive edge. Therefore, the option of a half- yearly or quarterly reset should be implemented. More frequent intra- year resets of interest rates on small saving instruments, with built- in automaticity linked to benchmark G- sec (government security) yields, need to be brought in. Also, the benchmark should be based on the average of the previous six months or even shorter intervals, so as to better capture changes in interest rate cycles within a year. In other words, returns on small saving schemes could fluctuate every three months, according to market rates. It could mimic the 10- year government security, where the interest rate movement depends on demand and supply of 10- year bonds and the prevailing interest rate.

Naturally, this would affect the final yield of investors. For example, if benchmark interest rates such as the 10- year G- Sec begin to yield seven per cent, small saving schemes could also be reduced to close to seven percent, affecting the final returns of investors. Obviously, the rates will go down in tandem with whatever the rates are in the market. That would make it unattractive as compared to a bank deposit or other fixed income instruments. Others say the move will benefit investors if the rates go up but will not make small saving so attractive if these go down. Rustagi feels the rates should be reset only once a year. Says Rustagi, " The investors are already getting market rates, re- set every year. Changing it more frequently might not be wanted for now, especially considering a lot of these investors come to small saving for safety of their capital.

In India, we don't have social security; investors also know the era of 12 per cent and 14 per cent returns is gone. So, the rates should be reset only on a yearly basis. Among post office savings schemes, the Monthly Income Plan is a popular instrument but there's a cap of investment of 4.5 lakh in a single account and 9 lakh in a joint account. It's one of those few instruments where the investor is getting a steady income. There's a cap here on investments but, nevertheless, investors who want a regular sort of income go for these instruments. But experts say if you are in the highest tax bracket, then these schemes might not give you the optimum post- tax return, as compared to some other fixed income schemes. It does not make sense for investors in the high tax bracket, as post tax returns are very low. Among small saving schemes, the Public Provident Fund still holds pride of place because of its tax- free status. PPF should be figuring in everyone's investment list because of its tax- free income.

 

 

For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call

 

 

Leave a missed Call on 94 8300 8300

 

Leave your comment with mail ID and we will answer them

OR

You can write back to us at

PrajnaCapital [at] Gmail [dot] Com

 

---------------------------------------------

Invest Mutual Funds Online

Invest Any Mutual Fund Online

 

Download Mutual Fund Application Forms from all AMCs

Download Mutual Any Fund Application Forms

---------------------------------------------

 

Best Performing Mutual Funds

    1. Largecap Funds             Invest Online
      1. DSP BlackRock Top 100 Fund
      2. ICICI Prudential Focused Blue Chip Fund
      3. Franklin India Bluechip
      4. ICICI Prudential Top 100 Fund

B. Large and Midcap Funds         Invest Online

      1. ICICI Prudential Dynamic Plan
      2. HDFC Top 200 Fund
      3. UTI Dividend Yield Fund
      4. Birla Sun Life Front Line Equity Fund
      5. Franklin India Prima

C. Mid and SmallCap Funds          Invest Online

      1. Reliance Equity Opportunities Fund
      2. DSP BlackRock Small & Midcap Fund
      3. Sundaram Select Midcap
      4. IDFC Premier Equity Fund
      5. Birla Sun Life Dividend Yield Plus
      6. SBI Emerging Businesses Fund
      7. HDFC Mid-Cap Opportunities Fund
      8. ICICI Prudential Discovery Fund

D. Small and MicroCap Funds   Invest Online

      1. DSP BlackRock MicroCap Fund

2.       Franklin India Smaller Companies

E. Sector Funds          Invest Online

      1. Reliance Banking Fund
      2. Reliance Banking Fund
      3. ICICI Prudential Banking and Financial Services Fund

F. Tax Saver Mutual Funds      Invest Online

1. ICICI Prudential Tax Plan

2. HDFC Taxsaver

      1. DSP BlackRock Tax Saver Fund
      2. Reliance Tax Saver (ELSS) Fund

G. Gold Mutual Funds        Invest Online

      1. Relaince Gold Savings Fund
      2. ICICI Prudential Regular Gold Savings Fund
      3. HDFC Gold Fund
      4. Birla Sun Life Gold

H. International funds         Invest Online

1. Birla Sun Life International Equity Plan A

2. DSP BlackRock US Flexible Equity

3. FT India Feeder Franklin US Opportunities

4. ICICI Prudential US Bluechip Equity

5. Motilal Oswal MOSt Shares NASDAQ-100 ETF

 

No comments:

Mutual Fund Application Forms Download Any Applications
Invest in Tax Saving Mutual Funds Invest Online
Infrastructure Bond Application Forms Download Applications
Related Posts Plugin for WordPress, Blogger...

Popular Posts