The interest on small savings schemes- such as Kisan Vikas Patrika, National Saving Certificate and Public Provident Fund- may go up in the next quarter. This is because 10-year-bond yield has crossed the 8 per cent mark, after the Reserve Bank of India (RBI) increased its key policy rates on Wednesday. Last time bonds were seen at this level in May 2015. Currently, PPF is offering 7.6 per cent.
Pankaj Mathpal, founder of Optima Money, a wealth management company, said, “Interest rates on small saving schemes are expected to increase. Considering the pending hike, investors who are waiting to enter in small saving schemes can wait for a few more days.”
Interest rates on small saving schemes are market-determined. They are announced every quarter against the earlier practice of revising it just once a year. It is, currently, calculated based on average bond yield (of the same maturity) in previous three-month with a small mark-up. In case of PPF, a premium of 0.25 per cent is added.
The 10-year government bond has given the average yield of 7.64 per cent since April 1. Going by the formula, PPF interest rate should be increased to 7.89 per cent in the second quarter which starts from July next month. If the yield continues to rise, the interest rate could go up further. The interest rate remained unchanged for the first quarter (April to June).
With the increase in repo rate by RBI banks are also expected to increase interest on fixed deposits, which is currently in the range of 6.25 to 6.50 per cent.
Where should you invest now? Till the rates are announced for next quarter you can invest in short-term debt funds with accrual strategy. You can compare return once the rates are announced and could accordingly switch out your money. Debt funds follow two types of strategies- accrual and duration. Under duration strategy, funds make money by predicting interest rate movements and accordingly, buy and sell securities. Accrual funds do not take interest rate risk but stay invested till the security matures.