Wednesday, June 29, 2011

Good News for Debt Market Investors

We all know that debt instruments like bonds and other deposits offer a fixed interest rate. But, recently there is a fresh development that is even better news. Read on to find out more about it.

Who is this news for?

This news if for the risk averse investor who selects NSC, PPF and other savings and debt instruments as his first investment choice. As you might already be aware, these instruments NSC, PPF are 100% safe investment havens and offer decent returns at literally 0 risk. Hence they are a preferred choice for investors.

What caused this news?

Till now, the returns on these investments have been the same for ages. When I started earning many years ago, the rate of returns on these instruments were hovering around the 8% mark and in spite of the many years that have gone by, the rates are still the same. They are pretty much considered fixed return instruments and their rate of returns do not change and most importantly investors do not have much choice when it comes to choosing these investments. But, this is all set to change.

What is this Good News?

The Rate of Returns on these instruments are no longer fixed. The rate of returns on these debt instruments will be pegged against a bench mark and the rates will be revised every year depending on what the benchmark is.
For Ex: the rate of returns on a 1 year post office deposit will be pegged against the 364 day Treasury Bill offered by the Govt. of India. The details are:

Saving Instrument Current Rate of Returns Proposed Rate of Returns Benchmark Rate
1 Yr Time Deposit 6.25% 6.8% 364 Day T-Bill
5 Yr Time Deposit 7.5% 8% 5 Year Govt Securities
5 Yr Recurring Deposit 7.5% 8% 5 Year Govt Securities
5 Yr Senior Citizen Savings Scheme 9% 8.7% 5 Year Govt Securities
5 Yr NSC 8% 8% 5 Year Govt Securities
10 Yr NSC N/A 8.4% 10 Year Govt Securities
PPF 8% 8.2% 10 Year Govt Securities

Is there any Bad News?

Well Yes, the only bad news I can think of is the fact that, the loans offered against such instruments will get costly because the rates offered by them are going up. Apart from this I cant think of any other bad news. For Ex: You can take loans against your PPF deposits. The new proposal states that, the rate of interest on the loans on PPF will be pegged at 2% greater than the rate that is offered on PPF Deposits.

All else considered, this is indeed a good news for all investors who want safety and stability on their investments.

Happy Investing!!!

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