Small Savings Schemes – Semi-deregulated interest rate regime ahead

Jayant Pai | jayant@ppfas.com

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…

2 Comments

  1. Very true. Most ELSS investors do so mainly for the section 80 C rebate and majority of them do not even fully understand the features and merits. This is proven by the fact that most investments in ELSS have a ticket size of less than 1 Lac ( which is the max. limit for 80 C), though there is no upper limit on investments in ELSS. Infact a small section are not even aware that they are taking an exposure to equity.Yet they have benefited from the long term appreciation on these schemes. Without the tax saving incentive, very few investors would want to lock in their money in a close ended equity MF for 3 years.

  2. Investments in the government’s small savings schemes have proved to be quite a misnomer for investors. Thanks to Jayant Pai who has shared details about the dynamic interest rates on these, I will now explore other avenues to enjoy tax benefits and growth in savings.

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