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Photo: iStock
Photo: iStock

Government-backed alternatives to Small Savings Scheme

  • In the current interest rate environment, small savings schemes are the best option for conservative investors who don’t invest in equities and want to put money in products backed by the government.

The government has kept Small Savings Schemes’ interest rates unchanged for the next quarter. Between January and March, the interest rates will continue to remain the same.

In the current interest rate environment, small savings schemes are the best option for conservative investors who don’t invest in equities and want to put money in products backed by the government.

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“Besides conservative investors, even others can keep a portion of their debt portfolio in the Small Savings Scheme," said Malhar Majumder, partner, Positive Vibes Consulting and Advisory, a firm that distributes financial products.

BETTER FIXED INCOME OPTION

The interest rates on long-term FDs from public sector banks (PSBs) are lower than what Post Office Savings Schemes offer, according to banks’ websites.

State Bank of India offers between 5.3% and 5.4% rates for FDs between three and 10 years. For the same period, Canara Bank rates are 5.5%, and Punjab National Bank gives 5.25%.

On its fixed deposits of three and five years, the Post Office offers 5.5% and 6.7%, respectively. Even on its Monthly Income Scheme, the rates are at 6.6%, which matures in five years.

The only two options where interest rates are close to small savings schemes are FDs from PNB housing and Floating Rate Savings Bonds. PNB Housing offers 6.6-6.7% for deposits between three and 10 years. The interest rate on Floating Rate Savings Bonds is 7.15%.

However, just like Small Savings Schemes, the rates on these bonds could change every quarter. The next reset date is on 1 January 2021, and the government is yet to announce the new interest rate on these bonds.

Headline: Rates for small savings schemes
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Headline: Rates for small savings schemes

OPTIONS FOR SENIORS

The interest rate on the Senior Citizen Savings Scheme is 7.4​%, which is better than bank FDs for seniors. Besides this, another government-backed scheme for seniors is Pradhan Mantri Vaya Vandana Yojana. It’s sold through Life Insurance Corporation of India.

The interest rates vary on the scheme depending on the frequency of payment a retiree chooses. If the senior decides to receive yearly payments, the rates are up to 7.66%. For half-yearly, quarterly, and monthly payment, they are 7.52%, 7.45% and 7.4%, respectively.

Many experts feel that interest rates will either remain the same or could even fall. If inflation continues to remain high, their real return could be negative or low. Conservative investors, therefore, need to have a multi-asset approach unless they are seniors.

They can invest a small portion in equities through mutual funds. Even a 10-15% of the portfolio in equities over the long term (over 5-7 years) will help to generate better returns.

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