Should you go for small saving schemes?

Government of India has decided to keep the interest rates on small saving schemes unchanged for the July to September 2021 quarter. It looks like investors got some more time to lap up these schemes offering better yields than many other fixed income options. But before you decide you should be looking at your financial goals and consider diversification too, say experts.

Why the rates have been kept constant?

On April 1, 2021 the government reversed large cut in the interest rates on small saving schemes, which was announced the previous evening. The reversal was quickly linked with state legislative assembly elections. Since then the situation has changed a lot. We have seen many parts of the country going through restrictions to fight spread of second wave of COVID-19 and inflation in India is catching up in line with global trend.

On the one hand, the second wave of COVID-19 has shattered finances for many individuals and on the other hand, the rise in inflation has further eaten into the purchasing power of families. “Economy is yet to come out of the woods and by keeping the rates constant at attractive levels the government is addressing the need to support the low and middle income households which typically invest in small saving schemes,” says Joydeep Sen, Corporate Trainer- Debt.

Are rates attractive?

The interest rates payable on small saving schemes are attractive. For example, National Saving Certificate (NSC) offers 6.8 percent rate of interest compared to 5.4 percent for five year fixed deposit offered by State Bank of India. The last time the interest rates on small saving schemes were cut was in March 2020. Reserve Bank of India has cut repo rate by 115 basis points in CY2020, but small saving schemes’ interest rates were kept constant. The yield on 10-year benchmark government bond also went down by 85 basis points and 65 basis points in CY2019 and CY2020, respectively.

When most other fixed income avenues – be it bank fixed deposits or bonds have seen falling interest rates, the small saving schemes saw rates continue at attractive levels. Though most good quality bonds are offering negative real yield (nominal interest rate minus rate of inflation) due to rising inflation, the small saving schemes look better given the higher yields. Also at a time when the COVID-19 disruption has taken toll on the health of the corporate borrowers, investors would like to stick to high credit quality bonds. Since small saving schemes are backed by sovereign guarantee, there is little chance of default.

“Given the low rates across all fixed income investment avenues, small saving schemes are good investment options for investors,” says Jitendra Solanki, a SEBI-registered investment advisor.

If you have been following the bond market, then you would have noticed that the bond yields are rising across the world. But do not wait for higher rates on small saving schemes. The interest rates on small saving schemes were not cut in line with falling bond yield earlier. “Though the interest rates are expected to go up gradually in the economy, there is little chance that the rates on small saving schemes will be further enhanced in near future. Existing interest rates on small saving schemes are far higher than what they should be,” says Sen.

Should you invest?

Though the attractive interest rates make small saving schemes products attractive investment destination, do not jump with all your money. “Do take into your liquidity needs as many of these schemes score low on liquidity front,” says Sen.

If you are looking for intermittent liquidity, then you may also want to ladder your investments.

If you have some long term financial goals such as funding your retirement then you can also consider investing some money in equity funds along with public provident fund. If you intend to save money for your daughter’s education over more than ten years, then complimenting Sukanya Samriddhi Yojana with systematic investment plans (SIP) in equity funds make sense. Some allocation to equities through mutual funds can help you tide over the risk of high inflation as equities tend to beat inflation over long period of time.

“For senior citizens looking for regular income, investments in Pradhan Mantri Vay Vandana Yojana and Senior Citizen Saving Schemes work better,” says Solanki. Other individuals looking for fixed income investments, should ideally allocate some money to short duration bond funds along with senior citizen saving schemes, he adds.