Jayant Pai | firstname.lastname@example.org
By now you must be aware that the interest rates on Government Small Savings Schemes (SSS) have been increased. Newspapers are going around town proclaiming that this is a bonanza for small investors. Well, it is true that soon (Most probably from December 1, 2011) you will be earning more by investing in these instruments but in a way this move is similar to the recent deregulation of bank savings account rates by the Reserve Bank of India .
You may be earning more today but this could change in the future. In other words, interest rates on all SSS will be dynamic and linked to the yield for comparable Government Securities although the rate changes will occur only once in a year and the relevant announcement will be made on April 1 each year. The Government will however ensure that a spread ranging from 25 to 50 basis points over the relevant benchmark security will be maintained.
I will not go into enumerating the new interest rates and/or new instruments in detail but suffice to say that this is one more nail in the coffin of the older regime of fixed return investments. From now on, you will not be able to enjoy the best of all worlds viz. High Security, Income Tax Benefits and interest rate visibility for long tenures. In the case of Public provident Fund, interest rates were semi-dynamic to some extent but now this has been extended to all instruments.
I do not think this change will mean that you should undertake any wholesale recast of your SSS portfolio. While you have been granted greater latitude through the hike in PPF investment ceiling to Rs. 1 lakh, it is imprudent to exhaust your entire Section 80C limit only through this vehicle.
In fact I fear that the impending withdrawal of Section 80C benefit for Equity Linked Savings Schemes (ELSS) mutual funds, coupled with this increase in the PPF limit will induce tax saving oriented investors to skew their portfolios further in favour of debt and away from equity.
In a lighter vein, the Government may have made the life of Certified Financial Planners a wee bit more difficult as they will have to undertake more efforts to explain the virtues of a balanced asset allocation to their clients…