21 September, 2020

Positive Returns

There are ways of tweaking out more from the schemes available

Madhu Kapparath
Positive Returns
outlookindia.com
-0001-11-30T00:00:00+05:53
BY lowering the interest rate on small savings schemes by 1 percentage point, Budget 2003 has conformed to what has become something of an annual ritual. The Public Provident Fund (PPF) offered 12 per cent returns, tax-free and risk-free, in 1998. Today, it returns 8 per cent; and, going forward, the rates will be closely aligned to market rates. Does that mean small savings have become unattractive investments?

Not really. The interest rate fall in recent years has been accompanied by a sharper decline in the inflation rate. And, as Jaswant Singh noted in his budget speech, the inflation-adjusted returns (or the real rate of return) on small savings today are higher than they were when interest rates were at their peak.

For instance, the real rate of return on PPF investments today, factoring in 8 per cent nominal returns, is about 3.6 per cent. That’s still more than in 1998, when you’d have earned a real rate of only 0.4 per cent; and in 2001, when the nominal interest rate on PPF was 9.5 per cent, you would in fact have earned negative real returns. That’s...

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