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Investors in small savings schemes will earn a tad less — 0.1 percentage points in the October-December quarter compared with the July-September quarter. Blame this on the quarterly rate reset on these schemes effective April 2016 that replaced the annual reset mechanism that was prevalent until March 2016. The quarterly reset, meant to align returns on small savings schemes more closely with market rates, saw rates being cut sharply (0.4 to 1.3 percentage points) in the April- June quarter.
Rates should have headed further south in the July-September quarter in sync with the fall in rates of Government securities (G-secs). Thankfully, the government left the rates untouched then. Even now, the rate cut applicable for the October-December quarter across the various small savings schemes is far lesser than the fall in G-sec rates. While this is good news for investors, it carries the risk of the government going for deep cuts sometime in the future to align rates with market realities.
So, rather than wait, you can consider investing in those small savings schemes in which the rate at the time of investment stays till maturity. In these fixed rate products, new rates announced each quarter apply only to investments made in the quarter and hold till their maturity. 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.
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 — that is, new rates announced each quarter will apply to the entire accumulated corpus on these products.
Despite the rate cuts since April, most small savings schemes, except one to three-year time deposits, remain attractive. That’s because they offer rates higher than comparable debt options such as bank deposits. Many such as NSC, SCSS, five-year time deposits, PPF and Sukanya Samriddhi also enjoy tax breaks under Section 80C which pegs up their effective returns. Also, small savings schemes are guaranteed by the government and are as safe as they get.
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