Losing interest in small savings?

The month of July dealt yet another blow to those who invest in post office small savings schemes.

For the July-September 2017 quarter, interest rates across small savings products were slashed by 10 basis points over the previous quarter (April-June 2017). The good old PPF, for instance, now fetches only 7.8 per cent vis-à-vis 7.9 per cent in the April-June 2017 period and 8.0 - 8.1 per cent in 2016-17. In 2015-16, PPF fetched a much higher 8.7 per cent.

Rates have gone downhill steadily as the government decided to change the rate reset frequency on small savings schemes to every quarter, from April 2016. While rates were reviewed in all four quarters of last year, it was changed only twice. But for this year, rates have been revised in both the quarters so far. In earlier times, rates were being reset only on an annual basis.

This change in the reset mechanism is meant to align rates on small savings schemes more dynamically with market-linked rates — that is, in sync with changes on government securities (G-Secs). For instance, the 10-year G-Sec yield has dropped from 7.7 per cent on January 1, 2016, to about 6.4 per cent as of now.

A further fall may be in store if the RBI cuts interest rates in its upcoming Monetary Policy meet this week. That may spell more bad news for small savings schemes when the rates come up for review for the October-December 2017 period.

Frequent changes unsettling

Vighna, a 34-year-old Project Manager in an MNC IT firm, is wondering whether she should continue investing in the Sukanya Samriddhi Scheme for her daughter.

“Although the scheme came with several conditions and restrictions, it was a safe choice, which also offered a good return of 9.2 per cent at the time I started investing. It is now at least one percentage point lower and is going to be fluctuating more often. I think the government should have fixed rates at least for a scheme that focuses on the girl child,” she says.

Chennai-based Chandrakant Solanki, a retired Senior Cameraman from Doordarshan and former Trainer – Broadcast Journalism at Asian College of Journalism, is aware of the rate changes that post office schemes have been going through in recent times. He says that a fluctuating interest rate will be the only way forward as the government walks the path of fiscal reforms.

But at the same time, he has a point when he says, “The RBI cuts rates at one point in time. Each bank transmits it as deposit rate cuts after some time. Post office cuts rates at another interval. Since everyone is following the same economy, why can’t all of them be in sync?”

While he was earlier investing in the Monthly Income Scheme (MIS) and National Savings Certificate (NSC), he has completely stopped investing in post office schemes now.

On the other hand, Radha Krishnamurthy, a retired teacher from Kendriya Vidyalaya, Hebbal, Bengaluru, continues to invest in small savings schemes for tax-savings purposes, despite the rate revisions.

“I continue to work after retirement as an academic advisor in a private school. The pension I get from the Central government along with the salary from the current job makes my income taxable. Since I am not keen on tax-saving mutual funds that are risky and the PPF that has a long lock-in period, I stick to NSC,” she says.

But while she invested in NSC only in the January-March 2017 period for last year, she has made her NSC investments for this year in the first quarter itself, in anticipation of further cuts in interest rate. She is also a bit worried about her investment in the Senior Citizen Savings Scheme (SCSS) that is maturing this year. She had put in the entire eligible amount in the scheme at the time of her retirement in 2009.

After five years, she extended it for three more years (the maximum permissible extension) in 2014. From over 9 per cent interest in 2014, the SCSS will fetch only 8.3 per cent now, if she wants to reinvest the maturity proceeds.

Pursuing alternate investments

With post office schemes getting less attractive, seniors are willing to take higher risk to get higher returns. Radha invested in Sovereign Gold Bonds recently to diversify from small savings schemes and bank deposits.

Although she is aware that the maturity amount will depend on how gold prices move, she says that in her lifetime, she has never seen an investment in gold betray her at any point in time.

She is confident that she will make reasonable, if not astronomical, gains when the bonds mature.

Chandrakant says, “Since I get good pension, I am able to take a bit of risk. So for tax-saving purposes, I am now investing in Equity Linked Savings Schemes. The lock-in period is also lower here than any other tax-saving investment. Actually, I have divided my savings equally among tax-free bonds, mutual funds, bank deposits and secured NCDs (non-convertible debentures). This way, I am not putting all my eggs in one basket,”

For additional monthly income, he considers the recently launched Pradhan Mantri Vaya Vandana Yojana, which offers a fixed interest rate of 8 per cent, a better option for those who want to lock in money now. In contrast, the MIS offers only 7.5 per cent now.

He also adds that since seniors can’t use the tax deduction of ₹50,000 available exclusively for NPS investments, the government can make this fixed return scheme more attractive by giving it a tax deduction benefit.

With the attraction of high interest rates fading, investors feel that the post office should up the ante in customer service to compensate, as well as compete, with other investment options.

Compensate in other ways

The absence of a system to transact online with the post office is wearing off Vighna’s patience. Besides, she says that she opted for post office investments only for the relatively attractive rates, though service was not up to the mark.

“I had a difficult time transferring my Kisan Vikas Patra from one post office to another when I changed my residence” she recounts.

Also, like how her mutual fund managers send regular e-mail communications updating her on the market and the status of her investments, she feels the post office could also have a similar system to tell investors about what changes they can expect in small savings products.

“It will be of immense use for people like me who are always in a rush and don’t have time to read or watch news regularly to anticipate what is coming,” she adds.

Radha, too, says there is a lot of delay, loads of paperwork and the staff are not forthcoming or professional. But she continued to stick because rates were good and investments were supremely safe. However, now, with more fluctuations in rates, the pluses no longer outweigh the minuses.