Safe and rewarding — small savings schemes offered by the post office, and by some banks can make for a neat fit in your fixed income portfolio. With government backing, these schemes are as safe as they get. Given their no-risk profile, the interest rates offered by many of these schemes are very attractive — higher than what most banks offer on fixed deposits. Besides, many of these schemes enjoy tax breaks that pegs up their effective returns sharply.
While you can invest in small savings schemes any time of the year, now seems a particularly opportune time to do so. That’s because interest rates on these schemes are ruling high and could possibly decline in the coming quarters.
From April 2016, interest rates on small savings schemes are being reset on a quarterly basis. The idea is to align the rates on these schemes with those on government securities (G-Secs). So, as G-Sec rates move up or down, the rates on small savings schemes are also supposed to move up and down every quarter.
But in practice, the quarterly reset mechanism is not always implemented, especially when G-Sec rates are on the decline. For two quarters in a row (January to March 2019, and the recent April to June 2019), the rates on most small savings schemes have been left untouched, despite a significant decline in G-Sec rates. As a result, the rates on small savings schemes today are very attractive compared with many fixed income options. For instance, the interest rate on the Senior Citizen Savings Scheme (SCSS) is 8.7%, the Sukanya Samriddhi Yojana (SSY) gets 8.5%, while the PPF and the NSC both earn 8%. With tax breaks the effective returns are much higher.
Going by its recent statements, the RBI may continue with its policy rate cuts, which could also reflect on the G-Sec rates and eventually on the rates on small savings schemes.
Even if the RBI does not cut rates further, the Centre may still choose to moderate rates on small savings schemes to make up for the pending cuts. So, it makes sense to lock into high rates now, rather than wait and run the risk of settling for lower rates. That said, invest only in fixed rate schemes where the rate at the start stays the same until maturity.
Small savings schemes can be variable rate or fixed rate products. The popular PPF and the girl-child oriented SSY are variable rate products in which rates applicable on the investment keep changing throughout the tenure. So, new rates announced for each quarter will apply to the accumulated corpus until then. Ergo: it will not really help to rush into investments in these schemes just to take advantage of higher rates now.
But in fixed rate products, the rate at the start of the investment stays until maturity. New rates announced each quarter will apply only to investments made in the quarter and will hold till their maturity. This category comprises the NSC, SCSS, Kisan Vikas Patra (KVP), Post office monthly income scheme (POMIS) and Post office time and recurring deposits.