Expert advice

Nov 15, 2011,21.34 IST

Small Saving schemes - Are they attractive in new Avatar?

By Suresh Sadagopan

Small savings schemes used to be a major attraction, with investors. But, small savings schemes returns used to be static.

With rising interest rates, other assets had adjusted their payouts – but that did not happen in the case of small savings. Due to this, small savings schemes lost out to Bank FDs, NCDs, Company FDs, FMPs and the like.

Now, that has been corrected to some extent. Is this going to excite people and make them go for these?

Unlikely, in most cases.  The changes are there, but small. Time deposit in post office have gone up from the 6.25 – 7.5% range to 7.7 – 8.3% range. NSC has gone from 8% - 8.4%, but the 5% bonus at maturity has been discontinued. Hence, there is not much change in the returns. Now, NSC has a tenure of five years, down from six years. 

There is also a 10 year NSC which has been introduced now, offering a 8.7% return. All these instruments are currently offering returns lower than what a bank FD offers and may not sit well with most people.  Those not in the tax bracket or in the 10% tax bracket and want government guarantees, may find these useful.  An NSC offering 8.4% translates to a measly 5.8% post tax, for someone in the highest tax slab. That’s not much, isn’t it? Especially, when inflation is hovering between 9-10%.

The other change now is that, the rates have been linked to the government securities of similar maturities, with a 25 basis point spread ( 50 basis point spread in case of the 10 year NSC ).  So, expect these rates to go up and down every year in line with the prevailing rates then.

The rate for Senior Citizen Savings Scheme ( SCSS ), has been kept at the same level of 9%. The spread has been kept at 1% compared to the prevailing government security rates, keeping in mind the fact that Senior Citizens may depend on this income, for their sustenance.

However, the interest rate for PPF has gone up to 8.6%. This makes it attractive as this is a post-tax return. The post -tax return comes to 11.3% ( assuming Sec 80C benefit is being availed ), which is fantastic. An instrument yielding north of 16% pre-tax returns only, can give you such returns. Hence, this becomes a very good longterm wealth creation tool, in your hand. 

Also, the investment limit per year has been enhanced to Rs.1 Lakh.  PPF comes under Sec 80C and helps you to save tax, in the year of investment where you can take advantage of the enhanced limits. All in all, PPF has become a very attractive long-term savings instrument. It always was a weapon of choice for meeting longterm goals, especially Retirement and Child Education. 

Now, that weapon has become far more potent!

Make the most of this new opportunity in PPF, that has come up.  Otherwise, the other optione mentioned earlier – Bank & Company FDs, NCDs, Bonds, FMPs – score over other small savings instruments.

Another one that could offer excellent return possibilities over the next 2 – 3 year period could be a debt MF scheme, especially with medium and long maturities. Choose wisely, depending on your horizon and risk return expectations.

The author is a Principal Financial Planner at Ladder7 Financial Advisories.

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