The Finance Ministry distressed investors of small savings schemes by reducing the interest rates by up to 110 basis points for the April to June quarter, on Wednesday. However, the order was short-lived. Finance Minister Nirmala Sitharaman withdrew the interest rate cut order via an early morning tweet on Thursday. So, for now investors will continue to earn the old interest rates with Sukanya Samriddhi Account still offering 7.6 per cent returns, the highest among the small savings schemes. The popular public provident fund (PPF) allows 7.1 per cent interest on investments, 7.4 per cent under Senior Citizen Savings Scheme (SCSS). We did an interesting yet useful exercise to determine which of these popular investments double your money the fastest.
We will use the ‘Rule of 72’ to see how fast will these investments double your invested money. ‘Rule of 72′ is a formula where we divide the number ’72’ with the interest rate offered by the investment instrument to get an idea on how soon can you double your money with that particular investment. It is a useful thumb rule to plan for your goals in a better manner. Let’s take a look:
Let’s start with a bank savings account that offers a minimum interest rate of 4 per cent. Going by the Rule of 72, a bank account will take 18 years to double your money. This is an eye-opener for investors who do not take financial planning seriously and continue to let their money remain idle in savings account to earn the lowest interest rate. While a savings account is a great place to keep a part of your immediate emergency fund, it will hurt your finances if you do not invest your money for better returns.
Bank FDs at around 5 per cent will take more than 14 years to double your money (Applying Rule of 72= 72/5 = 14.4). Widely used fixed income savings instrument, PPF will take slightly higher than 10 years to double your money. (72/7.1= 10.14).
Similarly, Sukanya Samriddhi Yojana, a government scheme for the girl child, at the continuing interest rate of 7.6 per cent will take around 9.4 years to double your money. Kisan Vikas Patra (KVP) will take 10.43 years to double your money at the current interest rate of 6.9 per cent.
At 6.8 per cent, 5-Year National Savings Certificates will double your investments in 10.5 years. Though, these instruments need not necessarily allow you to invest for the relevant time to double your money, this exercise provides you a better idea about what these returns mean and where will these kind of returns take your investments.
Comparing with relevant debt mutual fund categories, at present medium to long duration mutual funds offer 6.6 per cent returns on an average. Medium to long duration funds have a Macaulay duration of the portfolio between 4 years and 7 years. Dynamic Bond Funds, which can invest across duration at the discretion of the fund manager, have delivered average returns of 6.8 per cent. At the current annual return percentages, as per the Rule of 72, these schemes will double investor’s money in around 10.7 years.
In the current interest rate scenario, fixed income investors look better off with small savings schemes instead of the above category of debt mutual funds. However, it is uncertain as to how long will the government hold the current interest rates as these returns are benchmarked to the yields on government securities. It is calculated based on a pre-defined formula. Hence this roll out remains a question.