<div><em>In a falling interest rate scenario, investors who rely primarily on fixed income are badly hit. <strong>Sunil Dhawan</strong> explains how to rejig their retirement portfolio by banking heavily on small savings</em>. </div><div> </div><div>On the day when markets, corporates and anybody who is a borrower rejoiced, a large portion of our investor community comprising of those who live on fixed income could have felt otherwise. The biggest casualty are the fixed income investors especially the retired citizens who rely on fixed income for their regular income needs. A big portion of their retirement portfolio go into bank fixed deposits and post office schemes including post office monthly income scheme and senior citizens savings scheme. </div><div> </div><div>With Reserve Bank of India, reducing repo rate by 50 basis points and forcing banks to lower the base rate, the deposit rate too has to fall but not necessarily in the same proportion. SBI, AXIS bank amongst others have already announced reduction in their deposit rates. Even though existing FD holder are not impacted till the FD matures, the reinvestment risk exists as future deposit will carry lower rates. </div><div> </div><div><strong>Small Savings:</strong> Post office (PO) small savings rates are governed differently. In line with the committee's suggestions, the government had decided to align rate of interest on small savings schemes with G-Sec rates of similar maturity, with a spread of 25 basis points. The rates in PO instruments are re-set every year on 1st April. </div><div> </div><div>Today, when FD rates in banks are around 7.5 per cent, the PO rates are anywhere above 8.5 per cent and even 9.3 per cent for the senior citizens savings scheme (SCSS). It remains to be seen how the government can change the PO rates mid-way especially when PO rates are politically motivated too. </div><div> </div><div><strong>How Bank Deposit Differ from Small Savings: </strong>There is no upper cap on investment amount in bank FD. However, for senior citizens savings scheme (SCSS) which is for a 5-year period and currently offering 9.3 per cent, the maximum that one may put in is Rs 15 lakh. Similarly, post office monthly income scheme (POMIS) with 8.4 per cent monthly return, has a limit of Rs 9 lakh and even PPF with 8.7 per cent return (not for fixed income savers) has a limit of Rs1.5 lakh. </div><div> </div><div><strong>What To Do Now:</strong> Fixed income savers should maximise the investment in PO till the rates are high. In all probability, they would be re-set downwards come April. For all those investing in bank FDs for their regular income needs or otherwise too, the ‘Laddering’ approach will help. </div><div>In Laddering, instead of putting the entire sum in a certain term-deposit, the sum is spread across term –deposits of varying maturities. For example, instead of putting Rs 5 lakh in 3-year deposit, one may spread across 1 lakh each in 1-year, 2-year…5-year deposits. What this approach does is to manage the interest rate risk. Laddering also helps in keeping your funds liquid. Higher amount can be put into the deposit offering the highest rate. </div><div> </div><div><strong>End Note:</strong> Bank FD and even PO deposits, are however are not wealth creators but destroyers. The interest income is fully taxable and interest rates are almost in line with prevailing inflation rate. The real return therefore is low or negative in Bank FDs. This, however, does not deter investor’s especially retired investors to shun bank FD as they heavily depend on them for their regular income household needs. Laddering will help them avoid the temptation to predict and time the interest rate cycle and instead get the most out of every dip or rise in the rates. Lastly, ensure you have some funds exposed to equities primarily through balanced mutual funds to take care of inflation.</div><div> </div><div> </div><div> </div><div> </div>
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