For generations, small saving schemes like Public Provident Fund (PPF) have been among the most trusted investment instruments for the salaried class, along with fixed deposits, real estate and gold.
However, in recent times, the returns on these investments have been falling. Be it PPF, or Senior Citizens Savings Scheme (SCSS) or National Savings Certificate (NSC), the interest rates on all these schemes have fallen by around 1-2 per cent over the last five years or so. PPF used to give a return of 8.7 per cent in 2014-15, which has now come down to 7.1 per cent, whereas NSC’s rate of return has dropped to 6.8 per cent during this period. SCSS interest rate during this time has fallen dramatically from 9.3 per cent to 7.4 per cent.
In April this year, the interest rate on PPF was cut sharply by 80 basis points from 7.9 per cent to 7.1 per cent. And with consistent decline in government bond yields, to which the interest rates of small savings schemes including PPF are linked, one cannot rule out further cuts in the future with PPF interest rate declining even below 7 per cent, which hasn’t happened since 1974.
Another point to note here is the difference between the absolute interest that one earns on their investments and the real interest rate that has been adjusted to remove the effects of inflation. With inflation rising to 6.09 per cent in June, the real returns on these schemes are much lower than what they were a few years back.
According to Dipika Jaikishan, Co-Founder and COO of Basis, a financial services platform for women, the only time one is growing the wealth is when savings are parked in investments that give you returns that are higher than inflation. The higher the gap between interest rate and inflation, the better your real returns are. “If your savings are not earning you inflation-beating returns, then you would need to save a lot more for certain financial objectives. Inflation can specifically hurt savings in the areas of future education and retirement goals. As money gets less valuable over time you may not be able to afford your current lifestyle at retirement,” she explains.
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