The impact of coronavirus may have in one way prompted the Government of India to plug-off the popular 7.75 percent Savings (Taxable) Bonds 2018. On May 27, 2020, the RBI released a circular saying the bonds will cease for subscription from 28th May 2020.
The bonds were a popular investment avenue considering they gave returns of 7.4 percent to investors. One could invest in multiples of Rs 1,000 in the 7.75 percent bonds starting from January 10, 2018 for a tenor of 7 years. Investors over 60 years old could prematurely exit from the lock-in period.
Neither the government nor the Reserve Bank of India gave any official reasoning on the surprise decision. However, a section of analysts believe that the government may have been forced to discontinue the bonds owing to the higher returns. Since the coronavirus pandemic, the government and even the RBI have slashed interest rates. While the government revised interest rates in March'20 across several savings schemes, the RBI monetary policy committee has slashed interest rates. The RBI's revisions resulted in bank deposit rates dropping.
The revisions were visible in savings scheme investments such as Pradhan Mantri Vaya Vandana scheme getting revised to interest of 7.4 percent from a previous 8 percent. Even PPF and Sukanya Samridhi account were revised to 0.8 percent. Schemes such as Post office monthly income were revised to 6.6 percent return while interest on Sukanya Samriddhi Yojana got revised to 7.6 from 8.4 percent.
The government's directive means that investors will not be allowed to invest in fresh bonds, however existing investors will continue to get redeemed.
Former Finance Minister P Chidambaram in a series of tweets highlighted the significance of the RBI bonds He said, "After lowering the interest rates in PPF and small savings instruments, the abolition of the RBI Bond is another cruel blow... All citizens must demand that the RBI Bond must be restored immediately."
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"Every government is bound to provide at least one safe, risk-free investment option to its citizens. It was the RBI bond since 2003," he said in another tweet.
"Government has dealt another blow to citizens who save, especially senior citizens. It has discontinued the 7.75 per cent RBI Bonds," read another tweet.
With interest rates across several savings schemes curtailed and the 7.75 percent bonds discontinued for new investors, here are five investment avenues that may make sense to those keen on investing in saving schemes:
1. Post office savings: One could invest starting from Rs 1,500 to a maximum of Rs 4.5 lakhs in these savings schemes. The tenor stands at 5 years while the interest offered at maturity is 6.6 percent. Interest is subject to individual investor's tax slabs.
2. PPF (Public Provident Fund): Until March 2020, the PPF scheme delivered a return of 7.9 percent per annum which has been revised to 7.1% One can invest starting from Rs 500 up to Rs 1.5 lakh every financial year. The maturity period is 15 years while partial withdrawals are permitted at completion of six years.
3. National Savings Monthly Income Scheme: Individuals and groups can invest in these schemes announced in December 2019. The interest rate up to March 2020 stood at 7.6 percent for a lock-in period of 5 years. The revised interest rate is 6.6 percent. Investments can start from Rs 100 and can go up to Rs 4.5 lakhs for individual investors or Rs 9 lakhs for joint accounts. Premature withdrawals are subject to a penalty. These interest rates are subjected to periodic revisions.
4. Senior Citizens Savings Scheme: The 5 year senior citizens savings scheme that offered 8.6% interest rate could still remain a good investment option. The revised return rates stand at 7.4 percent. The tenure for the scheme is 5 years and premature withdrawals could be subject to penalties.
5. Fixed Deposits: SBI recently launched WeCare deposit a five year tenor term deposit that offers 6.5 percent interest. However, the product is available only for senior citizens. Standard Bank Interest FD rates vary from 4 percent to 7 up to percent.
Disclaimer: Schemes mentioned above are only for information and are subject to periodic changes. Readers are advised to consult with a registered financial analyst or a financial advisor prior to investing. Image attributed to Micheile Henderson for UnSplash.