LAST WEEK, the interest rate on Public Provident Fund (PPF), and a number of other deposit schemes run by the government (Kisan Vikas Patra, the girl child scheme, senior citizens deposit etc) were cut by 0.1% per annum. PPF went down from 8.1 to 8.0%.
There were some protesting noises on social media and from some of the usual suspects, but they were mostly just murmurs, probably because of the marginal quantum of the cuts.
In fact, a lot of people wondered what was the point of such a small cut. This shows that the idea that these rates are now market-linked is not widely known. They are reset every quarter, depending on the interest yield on government securities. Give how things are going, it won’t be too surprising if these rates fall further. PPF rates are already at a historic low and if they go below 8% then the psychological impact of hearing 7-point-something will be huge on savers. The KVP is already down to 7.7%.
It’s also worth noting that there’s a maths trick to this 0.1%. Your income from PPF is actually down by 1.2%.
The point that savers have to realise sooner rather than later is that PPF and these other schemes are now poor vehicles for long-term savings. PPF specially is widely used as a tax saving and retirement vehicle. However, it does not even maintain the value of your money after taking real inflation into account. While the official inflation rate may be less than the PPF rate, the inflation rate in your own life, especially that of the old and retired, tends to be higher. Expenses such as medical services hardly stick to the orderly single-digit world of the Consumer Price Index.
This sounds like heresy to the conventional way of thinking about savings in our country, but abandoning PPF and using equity-based tax-saving and retirement solutions like ELSS and NPS is increasingly unavoidable.
THE HINDUSTAN TIMES,
NEW DELHI, 3RD OCTOBER, 2016
There were some protesting noises on social media and from some of the usual suspects, but they were mostly just murmurs, probably because of the marginal quantum of the cuts.
In fact, a lot of people wondered what was the point of such a small cut. This shows that the idea that these rates are now market-linked is not widely known. They are reset every quarter, depending on the interest yield on government securities. Give how things are going, it won’t be too surprising if these rates fall further. PPF rates are already at a historic low and if they go below 8% then the psychological impact of hearing 7-point-something will be huge on savers. The KVP is already down to 7.7%.
It’s also worth noting that there’s a maths trick to this 0.1%. Your income from PPF is actually down by 1.2%.
The point that savers have to realise sooner rather than later is that PPF and these other schemes are now poor vehicles for long-term savings. PPF specially is widely used as a tax saving and retirement vehicle. However, it does not even maintain the value of your money after taking real inflation into account. While the official inflation rate may be less than the PPF rate, the inflation rate in your own life, especially that of the old and retired, tends to be higher. Expenses such as medical services hardly stick to the orderly single-digit world of the Consumer Price Index.
This sounds like heresy to the conventional way of thinking about savings in our country, but abandoning PPF and using equity-based tax-saving and retirement solutions like ELSS and NPS is increasingly unavoidable.
THE HINDUSTAN TIMES,
NEW DELHI, 3RD OCTOBER, 2016
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