Interest rates are on a downhill for quite some time now. State Bank of India the biggest lender, has slashed its one to two year deposit rates further by up to 40 basis points. Now the one year deposit with SBI will fetch you 6.75 per cent interest as against 6.90 per cent earlier.
After demonetisation, banks were flushed with liquidity and poor credit offtake has forced them to cut interest rates on deposits.
But experts believe further rate cuts are unlikely till the Reserve Bank of India (RBI) initiates any rate cut. The RBI left policy rates unchanged in its latest monetary policy review in June. "With the yield curve moving down on the shorter end, SBI has cut the deposit rates in 1-2 year maturity bucket for retails investors. With CP rates hovering around 6.60 per cent and CD rates now around 7.2 per cent, we don't' expect any further cut in retail deposit rates, till the time RBI further initiates a cut in its policy rates in the upcoming monetary policy statement either in August or October," said Manoj Nagpal, CEO, Outlook Asia Capital.
Even interest rates on some of the popular small saving schemes (SSS) such as public provident fund (PPF), senior citizen savings scheme, which are considered good alternative to bank deposits, have been revised downward for the quarter ending September 2017. From April 2016, the interest rates on small saving schemes is reviewed quarterly, depending upon on the yield of the government securities of similar maturity.
Should you continue investing in PPF?
Expert believe that, given the tax advantage, PPF is still a good option given the tax advantage it enjoys. "PPF and other small savings rates continue to be attractive for small investors at current levels providing a real interest scenario significantly higher than inflation. Investors should avoid taking credit quality risks for higher yields as the overall growth and NPA issues have not been sorted," says Nagpal.
Debt Mutual Funds a good alternative
If you are looking for better tax efficient returns and willing to take some amount of risk then you can also opt for debt mutual funds with shorter maturities. Debt funds tend to benefit from falling interest rate scenario and that is why over the past two years they have delivered double-digit return. Although debt funds may not deliver double -digit returns this year but investors, especially those in highest tax bracket, can look for short-term and ultra short-term funds depending on their investment tenure as an alternative to FDs as they have the ability to deliver higher than FD returns. Debt funds are also tax efficient than FDs over long-term as indexation benefit is available on the long-term capital gains incurred after three years. Indexation benefit adjust the gains to price rise hence reducing the tax considerably.
Right now experts are suggesting investors invest in accrual funds for lower volatility in returns.
Accrual funds focus on earning returns by investing high interest rate bonds while duration funds focus on generating returns through capital appreciation by taking exposure to higher maturity papers during falling interest rate scenario.
"Investors should consider investing in accrual funds to generate steady returns with low volatility. While existing investors can continue to hold dynamic bond funds as possible rate cut can trigger a rally, fresh investments are best done in accrual is the possibility of high return through interest rate rally may be lower this year compared with last year" says Vidya Bala, Head of Mutual Fund Research - Fundsindia.com.