The Public Provident Fund (PPF) and the Senior Citizens’ Savings Scheme (SCSS) that have long been an automatic first choice for conservative investors and those seeking regular income, respectively, may not remain so, if the recommendations of the committee headed by Shyamala Gopinath, deputy governor, Reserve Bank of India, are adopted.
According to the government panel, all instruments falling under National Small Savings Scheme (NSSS), barring post office savings account deposits, will now be linked to the market in a controlled manner.
Currently, instruments such as PPF, National Savings Certificates (NSCs) and SCSS come under the fixed return category as their interest rates are administered by the Central government and remain more or less stable for years together. For instance, PPF has been giving 8% for about eight years.
The recommendations are in line with the committee’s initial idea of completely deregulating NSSS. Says Rajiv Kumar, committee member and secretary general, Federation of Indian Chambers of Commerce and Industries: “In principle, all kinds of rates should be market-oriented and this is a step in that direction.”
The committee has proposed that the rates for small saving instruments be benchmarked to those of government securities (G-secs) for similar maturity periods with a positive mark-up. The mark-up for SCSS is 100 basis points (bps), for NSCs 50 bps and PPF and other small savings instruments 25 bps each.
These rates will be notified afresh by the government at the beginning of every fiscal based on the average yields on G-secs in the previous calendar year. The committee has made an exception for FY12—instead of taking the average yield of the previous calendar year, they have taken the average yield of the previous fiscal.
In FY11, the annual average yield of 10-year G-secs was 7.92%. Including a mark-up of 25 bps, the PPF would give around 8.2% for FY12, 20 bps higher than what PPF gives now. However, SCSS doesn’t have that advantage. After adding a mark-up of 100 bps to the G-sec yield, SCSS will give about 8.7%, a drop of 30 bps from the 9% it gives at present.
However, the committee has proposed a cap of 100 bps so that the rates don’t fall or increase beyond that limit even if the average yield from G-secs does. The idea is to reduce the year-to-year volatility in administered rates.
The good news is that it has been proposed that the annual investment limit of PPF be raised from Rs 70,000 to Rs 1 lakh. The committee has also proposed to do away with the Kisan Vikas Patra (KVP) since there are multiple products in the space and KVP only serves the thrift needs of small investors.
For NSCs, two tenors of five and 10 years have been proposed, up from a single tenor of five years.
In order to align the postal savings deposit rate to the bank savings deposit rate, which is 4% now, the committee has recommended increasing the rate of interest by 50 bps—from 3.5% to 4%.
What it means for you
Though the recommendations lend volatility to your investments and change the texture of small savings schemes, the returns are unlikely to swing in extremes. Moreover, these instruments still retain the tax edge.
Says Rajiv Kumar: “Yields on G-secs are not very volatile. Yields may fall during some years and may go up in others. The returns on small saving instruments will also change accordingly. Hence, investors would not be impacted negatively even if yields fall during some years. Also, for the next few years, we do not see sharp correction in G-sec yields.”
But financial advisers do not share the view. Says Veer Sardesai, Pune-based financial planner: “Small savings scheme are meant for conservative investors who are looking at some guarantee of returns. But if small savings also become market-linked then what is the point of having long lock-ins? One would rather invest in FMPs (fixed maturity plans) or mutual funds to better one’s returns. Linking the returns of small savings schemes, in my opinion, defeats the purpose of these instruments.”
Since these are just proposals as of now, it’s still to be seen what pans out finally.
Abhishek Anand contributed to the story.