Small savings, big opportunity

In less than a week, on April 1, rates on small savings schemes offered by the post office are due for their next quarterly revision. There is a good possibility that this revision, to be effective from April to June 2017, will see rates being cut. But there is a window of opportunity until March 31 to lock into the prevalent high rates. This, you can do by investing until Friday in those small savings schemes in which the rate at the time of investment stays till maturity.

Effective April 2016, the government changed the rate reset frequency on small savings schemes to every quarter. Earlier, rates were being reset on an annual basis. This change in the reset mechanism was meant to align rates on small savings schemes more dynamically with market-linked rates — that is, in sync with rate changes on government securities (G-Secs). This was to narrow their wide rate gap over bank deposits which were ostensibly denting the latter’s inflows.

The first quarterly reset saw rates on small savings schemes being cut sharply (0.4 to 1.3 percentage points) in the April-June 2016 quarter. With G-Sec yields going rapidly downhill over much of the last year, the government should have slashed the rates on these schemes further. But it did not.

It stayed put in the July to September quarter, cut rates by just 0.1 percentage points in the October-December 2016 quarter, and then again held them unchanged in the January to March 2017 quarter. (see table).

In effect, small savings schemes still offer much better returns than comparable options such as bank deposits. This has largely benefited investors in such schemes.

But it has also upped the chances of the government going for sharp cuts now. The case for a rate cut is aided by a few factors. One, key state elections which may have held the government’s hand so far are now over, and with largely favourable results for the ruling party. This could give the government adequate political leeway to cut rates. Sure, banks, flush with funds after the demonetisation exercise, may not be nudging the government now to cut rates on small savings schemes. But the government would still want to cut these rates and reduce its borrowing cost — proceeds from small savings schemes form part of the government’s debt.

Next, despite G-Sec rates staging a comeback from December 2016, they are still far below the rates in April 2016 when small savings rates were last cut sharply. From about 7.4 per cent last April, the 10-year G-Sec yield crashed to about 6.2 per cent in December and has since then rallied to about 6.9 per cent . Still, G-Sec yields are about 0.5 percentage points lower than in April, giving the government room and reason to cut rates on small savings schemes. Even if it does not cut rates (in a best case scenario), the possibility of the government increasing rates on small savings schemes seems remote, given their wide disparity with market rates.

Ergo: it makes sense to lock into the prevalent high rates being offered by the post office. These investments are as safe as they get, being guaranteed by the government. Also, the rates are superior to those being offered by comparably safe options such as bank fixed deposits (about 6.5 per cent to 7 cent currently). But you have to pick and choose from among the various small savings schemes.

Choose from fixed rate schemes offered by the post office. In these schemes, new rates announced each quarter apply only to investments made in the quarter and hold till maturity. So, if you invest in these before March end, the rate at which you lock into will hold for the entire tenure. This category comprises the National Savings Certificate (NSC), Senior Citizen Savings Scheme (SCSS), Kisan Vikas Patra (KVP), Post office monthly income scheme (POMIS) and post office time and recurring deposits.

Despite the rate cuts since April, most of these schemes, except one to three-year time deposits, remain attractive, offering higher rates than comparable options. The best choices are the NSC (8 per cent) — a five-year cumulative scheme, SCSS (8.5 per cent) – a five-year quarterly payout scheme open to senior citizens, and five-year time deposits (7.8 per cent) — an annual payout scheme open to all investors. These investments also enjoy tax breaks under Section 80C; this pegs up their effective returns.

On the other hand, the Public Provident Fund (PPF) and Sukanya Samriddhi Scheme are variable rate products in which the rates keep changing throughout the tenure. New rates announced each quarter will apply to the entire accumulated corpus on these products. So, it makes little sense rushing to put money in these products.