Worthiness Of Small Savings Schemes In The Fixed Income Space

Against the context of rising inflation, with the government agreeing to keep interest rates on small savings schemes stagnant, investors in these strategies have no alternative but to stick on it in order to reap good returns compared to fixed deposits of banks. On 31 December, a government circular confirmed that interest rates on small savings schemes will stay static until 31 March. This suggests that the Public Provident Fund (PPF) will continue to fetch 7.1 per cent, Senior Citizens Savings Scheme (SCSS) with 7.4 per cent, post office time deposits with 5.5-6.7 per cent, National Savings Certificate with 6.8 per cent and so on. These returns actually saw a drastic decline from what they were before April 2020, with until then PPF having 7.9 per cent interest.

Lower savings rates, as well as stronger inflation, started in April. Inflation in price inflation has stayed above the higher end of the 6 per cent acceptable limit of the central bank during the fiscal year, hitting 6.93 per cent in November 2020. After that, interest rates have nearly stayed up with inflation on small savings schemes. In a few instances, strategies other than PPF have taxable benefit, indicating that the returns do not cover inflation until paying tax. In addition, higher prices as well as reduced interest income have pressured small investors. Yet, considering that fixed deposits at leading banks still yield just 4-6 per cent, small savings remain comparatively more appealing.

There was an assumption that, like FD rates, rates of small savings schemes would be reduced, but this has not occurred. In the fixed income sector, this tends to make them appealing. With an interest rate of 7.15% RBL Floating Rate Bonds have seen their rate kept stable, making it a strong choice for the investors as of now. With the exception of this, it is important to glance at an incremental change into hybrid funds that have some potential to overcome inflation by equity. Next year, inflation may decline, providing savers with a good return whereas investors still have some little hope.