How to survive changes in deposits interest rates?

Today morning, we all got a surprise from finance ministry about restoring back the decision to change interest rates on PPF, SSY & other small saving deposits.

Last night, we got a shock of reduction in interest rates but it followed by this surprise today! Well, reduction in rates of deposits was quite expected considering changes in bank deposit, loan interest rates.

People who were planning to start investing in any of these instruments, got worried and people who were about to ‘reinvest’ in the same, got a ‘real feel’ of ‘re investment risk’.

When we invest in any investment instrument, we are exposed to market risks, reinvestment risks, credit risks & investment bias. Above all these, our behavioral finance plays a huge role too.

How to keep a balance and stay invested in these changing times, please read through –

  • Re consider your asset allocation:

Asset allocation is important while planning your investments. You should decide your asset allocation based on your age, risk appetite & goal tenure. When we face such changes in interest rates, allocation to our fixed income instrument may undergo a change if you have a sizable exposure in it.

So, based on your risk appetite & goals, can consider change in allocation to equity in your portfolio. Here, please assess the state of equity performance, market outlook, details of the product while making a decision.

  • Diversification is a key:

We all know that deposit rates are subject to revision every quarter by a government. When we consider ‘safety net’ to our portfolio, we consider small saving deposits like post office deposits, Public provident fund, sukanya samruddhi yojana etc. These help us to receive tax effective returns and help to achieve our goals as well but we should not restrict ourselves to these only.

There are other instruments like mutual funds, NCDs, bonds etc which we should consider based on our risk appetite, goals & tenure.

When we diversify, we spread our risk.

  • Be mindful while spending:

People, especially senior citizens are dependent on interest income received from their investment in these kinds of instruments. When there is a sharp reduction in interest rates on these deposits, their income receivable undergoes a negative change. This in turn reduces regular inflow of money which they use for their household & medical expenses.

Like them, in India huge amount of population is dependent on these interest incomes and they suffer a lot when there is any negative change.

If you have decided to stick to these deposits only, then with reduced interest rates, you should be mindful about your spending.

You may delay your vacations or purchase of some house items but reserve well for your own medical expenses if you are not insured.

  • New retirees, please reconsider your retirement planning strategies:

People who are about to retire and to receive their retirement corpus, please be thoughtful while planning your investments. Majority of the population don’t receive any fixed pension amount from their employers so their retirement corpus is the only savior.

Generally, people are fearful of investing equity or any other risky investment instrument and stick to safe heaven. But, if such instruments though are safe but are not able to provide enough ‘real rate of return’ then to survive for 20-25 years of post-retirement life, you can take thoughtful exposure in ‘equity or equity mutual fund’.

Over the years, it will be useful to bit inflation, to provide you ‘best possible returns’ and to keep diversification in your portfolio.

Please don’t fall prey to any mis-selling of investment linked insurance product with guaranteed income when there are such changes in deposit rates.

  • Young and middle-aged people, please take a note and invest in these instruments:

For young and middle-aged people in their 40’s, instruments like Public provident fund, Sukanya Samruddhi yojana are a boon for long term investing, to provide diversification in their portfolio & to get safer and tax effective returns.

Any such sharp changes in interest rates of such instruments may not bother them much because generally age, risk appetite and goal tenure are on their side.

For any specific short term or medium-term goals, if you have invested in such instruments, then continue your investments. If you are choosing them to invest, just for a diversification, then please reconsider your asset allocation.

Investing is a long journey and we often face many changes due to these external reasons which are beyond our control but we can be thoughtful about our own portfolio and flexible enough to adapt to changes in best suitable ways!

Happy Investing!

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