THE CHARM OF SMALL SAVINGS

Government-sponsored small savings schemes have found a great fan following owing to their guaranteed return backing and tax savings in some cases

Fixed return instruments give a curious sense of satisfaction—the comfort of knowing that returns are assured and your money is safe as no less than the Government of India is backing them. Small savings instruments are an umbrella term used to describe savings instruments that were once available predominantly at the post office. Over the years, some of these also became available at the bank, but the fundamental structure remained the same—these instruments come with a guaranteed fixed return with the investments available for a finite period.

These are basically deposits in which you put money and it earns an interest that is paid out when the tenure ends. There was a time not too long ago when the returns from these instruments were attractive and one could create future income streams that could be used as retirement income or savings that could help fund children’s education and so on. While the interest rates on small savings have been on a decline for about two decades now, the real change started in 2011, when it got linked to government securities (Gsecs) yields with similar maturity in the preceding year.

Since 2011, interest rates on small savings have fluctuated, but the real twist occurred in 2017, when the government decided to review the interest rates on these schemes at the beginning of each quarter. Often, rates went unchanged for several quarters, but there have been instances when interest rates have changed every quarter as well (see Small Savings Rates). So much so, a few days before the beginning of each quarter, scores of small savers now eagerly await the announcement on interest rates.

When the interest rates go up, many treat it as an opportunity to lock into a riskfree return and park money.

When the rates go down, those who saved earlier during the higher interest period rejoice. Chances are they still continue in these instruments for the assured returns. Moreover, some schemes also come with tax saving incentives, which makes them attractive for those seeking a dual benefit (see Tax savings with Small Savings).

➘ SMALL SAVINGS, SMART STRATEGY

For scores of Indians with notsogood financial literacy, the small savings instruments offer a crude but effective way to enhance their savings. As most of them are riskaverse—even at the cost of seeing their money lose its worth—they are devoted to the guaranteed returns provided by small savings. At present, the CPI (consumer price index) inflation hovers at around 7.4 per cent, which means any financial instrument with returns lower than this does not meet inflation levels, hence eroding the real worth of the money invested.

At present ,only the Senior Citizens Savings Scheme (SCSS) and the Sukanya Samriddhi Yojana (SSY) scheme offer returns above 7.4 per cent, and both these instruments come with a lockin, which means they aren’t liquid enough. Yet, small savers swear by keeping their money in small savings. One reason other than the simplicity of its structure is that many use these for clear income replacement objective. For instance, the National Savings Certificate (NSC), which has a fiveyear lockin, can be used to create a clear income stream if planned well.

Say you put Rs 12,500 a month in the NSC over a 10year period at age 50, then from age 55, each of the fiveyear monthly investments would come up for maturity. Now, if this sum is reinvested and an additional Rs 12,500 invested from age 60 to age 65, you will have a guaranteed income stream when you retire. Considering the predictability of income that one looks for in retirement, small savings instruments come in handy to provide for this confirmed money flow.

The PPF is also a popular instrument that comes in handy as longterm savings with its 15year lockin. Here, on completion of the lockin, one can continue to have the account for further blocks of five years with contribution or without fresh contribution. By this time, there are partial withdrawal provisions within the PPF that can be used smartly to create a taxfree income stream because maturity from PPF is exempt from income tax. Such simple structure of deposits find favour among people averse to putting money in other marketlinked instruments.

The popularity of small savings is understandable among the elderly and those who benefited from these schemes when the interest rate on these instruments was much higher and inflation much lower. However, with inflation eating into the stated returns on small savings, small savers should consider exploring similar guaranteed return instruments such as GoI bonds issued by the central bank through the RBI Direct portal.

To tap into scores of small savers, the RBI could explore offering bonds through post offices so that people who are not internet savvy could benefit from the higher return prospects that some of the bank’s bonds offer. As for people who don’t believe in taking risks with their money, it is high time they understood the futility of trying to maintain their money’s worth when putting money in instruments that pay less than the prevailing inflation rate. If small savings is your calling, make sure you opt for the taxsaving variety so that you at least retain your money’s worth. ■

USE SMALL SAVINGS AS AN OPPORTUNITY TO BENEFIT WHEN THE GUARANTEED RETURNS ARE HIGH, ELSE YOUR SAVINGS WOULD BE TOO SMALL AND MEANINGLESS