In
less than a week, on April 1, rates on small savings schemes offered by
the post office are due for their next quarterly revision. There is a
good possibility that this revision, to be effective from April to June
2017, will see rates being cut. But there is a window of opportunity
until March 31 to lock into the prevalent high rates. This, you can do
by investing until Friday in those small savings schemes in which the
rate at the time of investment stays till maturity.
Quarterly rate resets
Effective
April 2016, the government changed the rate reset frequency on small
savings schemes to every quarter. Earlier, rates were being reset on an
annual basis. This change in the reset mechanism was meant to align
rates on small savings schemes more dynamically with market-linked rates
— that is, in sync with rate changes on government securities (G-Secs).
This was to narrow their wide rate gap over bank deposits which were
ostensibly denting the latter’s inflows.
The
first quarterly reset saw rates on small savings schemes being cut
sharply (0.4 to 1.3 percentage points) in the April-June 2016 quarter.
With G-Sec yields going rapidly downhill over much of the last year, the
government should have slashed the rates on these schemes further. But
it did not.
It
stayed put in the July to September quarter, cut rates by just 0.1
percentage points in the October-December 2016 quarter, and then again
held them unchanged in the January to March 2017 quarter. (see table).In
effect, small savings schemes still offer much better returns than
comparable options such as bank deposits. This has largely benefited
investors in such schemes.
Rate cut possibility
But
it has also upped the chances of the government going for sharp cuts
now. The case for a rate cut is aided by a few factors. One, key state
elections which may have held the government’s hand so far are now over,
and with largely favourable results for the ruling party. This could
give the government adequate political leeway to cut rates. Sure, banks,
flush with funds after the demonetisation exercise, may not be nudging
the government now to cut rates on small savings schemes. But the
government would still want to cut these rates and reduce its borrowing
cost — proceeds from small savings schemes form part of the government’s
debt.
Next,
despite G-Sec rates staging a comeback from December 2016, they are
still far below the rates in April 2016 when small savings rates were
last cut sharply. From about 7.4 per cent last April, the 10-year G-Sec
yield crashed to about 6.2 per cent in December and has since then
rallied to about 6.9 per cent . Still, G-Sec yields are about 0.5
percentage points lower than in April, giving the government room and
reason to cut rates on small savings schemes. Even if it does not cut
rates (in a best case scenario), the possibility of the government
increasing rates on small savings schemes seems remote, given their wide
disparity with market rates.
Ergo:
it makes sense to lock into the prevalent high rates being offered by
the post office. These investments are as safe as they get, being
guaranteed by the government. Also, the rates are superior to those
being offered by comparably safe options such as bank fixed deposits
(about 6.5 per cent to 7 cent currently). But you have to pick and
choose from among the various small savings schemes.
Good choices
Choose
from fixed rate schemes offered by the post office. In these schemes,
new rates announced each quarter apply only to investments made in the
quarter and hold till maturity. So, if you invest in these before March
end, the rate at which you lock into will hold for the entire tenure.
This category comprises the National Savings Certificate (NSC), Senior
Citizen Savings Scheme (SCSS), Kisan Vikas Patra (KVP), Post office
monthly income scheme (POMIS) and post office time and recurring
deposits.
Despite
the rate cuts since April, most of these schemes, except one to
three-year time deposits, remain attractive, offering higher rates than
comparable options. The best choices are the NSC (8 per cent) — a
five-year cumulative scheme, SCSS (8.5 per cent) – a five-year quarterly
payout scheme open to senior citizens, and five-year time deposits (7.8
per cent) — an annual payout scheme open to all investors. These
investments also enjoy tax breaks under Section 80C; this pegs up their
effective returns.
On
the other hand, the Public Provident Fund (PPF) and Sukanya Samriddhi
Scheme are variable rate products in which the rates keep changing
throughout the tenure. New rates announced each quarter will apply to
the entire accumulated corpus on these products. So, it makes little
sense rushing to put money in these products.
