Small savings interests changed – How does it this affect you?

Indian Govt has changed terms and conditions of certain small savings schemes effective 1, April, 2016. In this blog, let us explore what this means to many popular funds.

PPF – Changes
1.Interest
– Rate – Govt Securities (G-Sec) +  0.25%
2.Premature closure now possible –
– In genuine cases – Serious ailment, higher education of children etc,.
– A penalty of 1% reduction in interest payable on the whole deposit
– Only after five years from the date of opening.

NSC Changes
1. Interest
– Compounded annually rather than every six-months
– G-Sec of comparable maturity + 0.25%

KVP changes
– Compounded annually
– G-Sec of comparable maturity + 0.0 % (No premium over govt securities)

Overall changes
– Interest rate re calibrated on a quarterly basis
– For example – Rates of interest applicable for the quarter from April to June 2016 effective from 1.4.2016 would be notified in March, 2016

Value vs Price – Key difference to know for an investor

Price is what you pay and value is what you get.

When I was young and studying in Bangalore, tomato price used to fluctuate a lot. During wedding season (Apr-May), price of tomatoes would shoot up from 10 rupees a kilo to 50/100 rupees a kilo. When the price was high, my mother would buy less of it and we would get less of rasam and more of other non-tomato dishes.

A few months later, sometimes tomato price would crash due to a bumper crop. Situation would get so bad for farmers that they would not even recover the cost of transportation and hence throw their produce! Price would crash to less than a rupee a kilo and street hawkers would sell few kilos of tomato for 10 rupees. My mom would then buy tomato in bulk and use it for everything. We would attempt to even try to make *jam* from those tomatoes.

Moral of the story – My mum’s behavior – Buy less when the tomatoes are pricey and more when they are cheap.

Contrast this with what happens in the stock market – people flock to buy stocks when price goes up and dump them when price goes down.

Question to ask is why? Why are stocks different than tomatoes? The answer is difference between value and price.

If you know the value, you buy more when price is less than value.

My mom knew the value of tomato. She understood what it could be used for. Hence the behavior.

What does that tell about the stocks then? If you feel like buying stocks when the price goes up and selling when the price goes down, you don’t know the value. You are just gambling and nothing else! Wake up! Leave the market! and cut your losses!