Small savers need to get aggressive

Getting locked into instruments before the new regime kicks in would be a good strategy

‘Buckle up’ seems to be the message the government is sending to lazy investors who have depended for long on traditional small savings scheme (SSS) rates.

The SSS include Public Provident Fund (PPF), National Savings Schemes (NSC), Kisan Vikas Patra (KVP), Senior Citizens Savings Scheme, Sukanya Samridhi Scheme, Post Office Fixed Deposits and monthly income schemes. The cut in rates ranges between 60 and 130 basis points (bps) across schemes. The deep cut in the rates will bring down returns substantially.

What would worry investors even more is that from April 2016, the rates will be reset every quarter based on the G-Sec yields of the previous three months. In case of products such as PPF, the impact is immediate since the rate will change mid-way unlike fixed deposits (FDs), where the impact will be on new investments and at the time of renewal. As banks may now be encouraged to cut their deposit rates, returns from bank FDs, too, might not remain at the current levels for too long.

There could also be a rush to invest in some of these instruments before the new regime kicks in. For example, investors could rush to invest in KVP before, says Deepali Sen, founder of Srujan Financial Advisors. “When investors know that rates will fall from April, they would prefer to invest now than wait. In that sense, KVPs can be compared to FMPs (fixed maturity plans), which also have fixed maturities,” she says. Currently, in KVP, the investment doubles in 100 months. After the cut, it will take 110 months.

Assuming an investment of Rs 1 lakh, a three-year post office FD of Rs 1 lakh will earn Rs 1,000 less under the new rate, while a five-year Senior Citizens Savings Scheme will earn Rs 700 less. Similarly, a five-year KVP will earn Rs 900 less, a five-year NSC will earn Rs 400 less and a five-year Sukanya Samridhi will earn Rs 600 less.

A major impact could be on retirement savings, the PPF corpus forms a major part of retirement savings for most investors, says Anil Rego, CEO of Right Horizons. “Since the rates on these schemes will change periodically, it will change the way people manage their personal finances and force investors to look at alternative assets. Now, you will have to supplement this by taking risk and investing in equities. Even pensioners and retirees who until now could manage with fixed income alone may not be able to do so.”

From 2012-13, following the recommendations of the Shyamala Gopinath Committee, the SSS rates have become market linked. Until now, the rates were announced for the entire financial year. “In debt funds, interest rate fall of this kind results in capital appreciation of two-five per cent. But, neither this benefit nor the tax advantage of indexation - if held for more than three years - is available for investors in SSS. In my opinion, this move will make investors a smarter lot and move towards efficient investing,” says Feroze Azeez, deputy chief executive officer, Anand Rathi Private Wealth Management.

As long as inflation is low, investors will continue to earn positive returns from SSS, despite the rate cut. Earlier, the rates on SSS did not move in line with inflation. So, even though the rates were higher, those could not beat inflation, says Sen.