Small savings rate hikes a damp squib
Fixed deposits, FMPs, equity-linked schemes offer better returns
The government’s attempt to make small saving schemes more attractive by hiking interest rates by half a percent may fail to enthuse retail investors.
That’s because other products such as fixed deposits (FD), fixed maturity plans (FMPs) and equity-linked saving schemes (ELSS) are still offering better rates of return compared with small saving scheme products currently (see table).
The rates of interest even after tax will be higher compared with monthly income schemes, National Saving Certificates (NSC) and so on.
The new rates are effective April 1 and will be applicable for 2012.
It’s also in the government’s interest to make small-savings schemes attractive because any surge in collections helps it reduce its own market borrowings, and that’s why there has been the slew of moves to hike interest rates.
Suresh Sadagopan, who runs Ladder 7 Financial Advisories, said what makes the hikes even less attractive is that it’s not uniform across schemes.
“For some such as the NSC and monthly income scheme, the hike in rate is barely 0.2-0.3%. Therefore, there is no strong case why investors should ditch other products.”
The recommendation to revise the rate on small saving schemes annually was made by a panel headed by former Reserve Bank of India deputy governor Shyamala Gopinath.
The government then decided last November to align the rates with those offered by other securities. Monday’s move came against the backdrop of the Union Budget announcements two weeks ago, which said there would be a net outflow of `12,000 crore from small savings schemes in the current fiscal.
Financial planners believe this can be attractive only if banks revise fixed deposit rates after a slew of rate cuts. But till then, instruments such as FDs and FMPs remain clear winners.
“When interest rates in an economy start falling, other debt instruments will also have to correspondingly lower rates. In a reversing rate cycle, the returns of small saving schemes will be on a par with other savings instruments,” said Sandeep Shanbhang, director, Wonderland Consultants.
Experts said even in the saving scheme basket of products, only the public provident fund (PPF) stands out among competing instruments in terms of post-tax returns.
The post-tax return on FD is substantially lower than the tax-free returns provided by PPF.
“PPF should be a mandatory component in every retail investor’s portfolio. PPF will be the edge over other saving instruments in terms of post-tax returns,” said Shanbhag.
Fixed deposits, FMPs, equity-linked schemes offer better returns
The government’s attempt to make small saving schemes more attractive by hiking interest rates by half a percent may fail to enthuse retail investors.
That’s because other products such as fixed deposits (FD), fixed maturity plans (FMPs) and equity-linked saving schemes (ELSS) are still offering better rates of return compared with small saving scheme products currently (see table).
The rates of interest even after tax will be higher compared with monthly income schemes, National Saving Certificates (NSC) and so on.
The new rates are effective April 1 and will be applicable for 2012.
It’s also in the government’s interest to make small-savings schemes attractive because any surge in collections helps it reduce its own market borrowings, and that’s why there has been the slew of moves to hike interest rates.
Suresh Sadagopan, who runs Ladder 7 Financial Advisories, said what makes the hikes even less attractive is that it’s not uniform across schemes.
“For some such as the NSC and monthly income scheme, the hike in rate is barely 0.2-0.3%. Therefore, there is no strong case why investors should ditch other products.”
The recommendation to revise the rate on small saving schemes annually was made by a panel headed by former Reserve Bank of India deputy governor Shyamala Gopinath.
The government then decided last November to align the rates with those offered by other securities. Monday’s move came against the backdrop of the Union Budget announcements two weeks ago, which said there would be a net outflow of `12,000 crore from small savings schemes in the current fiscal.
Financial planners believe this can be attractive only if banks revise fixed deposit rates after a slew of rate cuts. But till then, instruments such as FDs and FMPs remain clear winners.
“When interest rates in an economy start falling, other debt instruments will also have to correspondingly lower rates. In a reversing rate cycle, the returns of small saving schemes will be on a par with other savings instruments,” said Sandeep Shanbhang, director, Wonderland Consultants.
Experts said even in the saving scheme basket of products, only the public provident fund (PPF) stands out among competing instruments in terms of post-tax returns.
The post-tax return on FD is substantially lower than the tax-free returns provided by PPF.
“PPF should be a mandatory component in every retail investor’s portfolio. PPF will be the edge over other saving instruments in terms of post-tax returns,” said Shanbhag.
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