For conservative investors who want to invest in safe investment alternatives or those looking for diversification; small saving schemes are viewed as good investment opportunity. These schemes entail public provident fund (PPF), Sukanya Samriddhi Yojana (SSY) and National Savings Certificate (NSC) and senior citizen saving scheme, among others.
These financial instruments offer tax benefits and superior credit rating, but as we know — they come at the price of a longer lock-in period.
“Small Savings are typically offered by government agencies and are therefore of the highest credit quality, as the returns and principle are both implicitly or explicitly guaranteed by the government. Depending on the product you choose, there may be some tax benefits as well. However, there is a longer lock in period (between 5 to 15 years) and amount caps for such investments. Hence for a retail investors, keeping all of these in consideration, a portion of fixed income assets which can be invested for medium to long term could be invested in Small Savings,” says Abhishek Dev, Co-Founder and CEO of Epsilon Money.
These are some of the popular small saving schemes:
Public provident Fund (PPF): It can be referred to as investment-cum-tax saving scheme. The Government-backed scheme ensures guaranteed returns over the amount deposited by the investors. The investment deposited under the scheme is eligible for income tax deduction under Section 80C.
The investors need not also worry about the tax on income earned from the fund as the scheme falls under Exempt-Exempt-Exempt (EEE) category. The PPF account can be opened with any post office or a national bank or even some private banks as well.
A key feature of PPF is that it can be transferred from post office to bank or vice-versa. However, it is vital to note that PPF does not allow joint or multiple accounts.
Sukanya Samriddhi Yojana (SSY): The parents of the girl child can invest in this scheme for a maximum number of 21 years. Return on this plan is among the best. Parents can use the amount accumulated under Sukanya Samriddhi Yojana for higher education or the marriage of the girl child. The investor can avail tax benefits under section 80C of the income tax act. The current rate of interest is 7.6 per cent as of 2022.
National Savings Certificate (NSC): Govt of India issues NSC. They are suitable for people in business and salaried employees. It is one of the most reliable savings plans in India. There are two types of NSC: NSC VIII issue, NSC IX issue.
The rate of interest of NSC is quite attractive. They provide returns better than fixed deposits. The maximum investment duration is five years for the VIII issue and ten years for the IX issue. Every year, Govt of India sets the rate of return, and the current recovery is 8.5 per cent and 8.8 per cent for the VIII and IX issues.
Small savings schemes Vs fixed deposit: There is no denying the fact that small saving schemes are of high credit quality and offer income tax benefits. So, the rate of interest should not be the sole criterion for choosing these investment schemes. In comparison, fixed deposits (FDs) tend to offer anywhere between 5 to 5.75 percent per annum depending on the tenor and the choice of financial institution.
But it differs from these schemes in multiple ways. First and foremost, FDs are covered under guaranteed given by DICGC (Deposit Insurance and Credit Guarantee Corporation) up to a maximum limit of ₹five lakh. Then, the regular fixed deposits don’t offer tax benefits.
On the other hand, they don’t have a lock-in period.
Let us find out more about fixed deposits here:
Fixed deposits (FDs): Fixed deposits have always been a popular choice as it provides the benefit of assured returns and has low-risks. There are broadly two types of fixed deposits, one being the most known which is offered by the banks which have lower risks.
Of late, some banks have raised their FD interest rates, thus further incentivising retail investors to invest their money in fixed deposits.
While the other one is corporate fixed deposits (FDs) which offer high interests but have much higher risks when compared with bank fixed deposits.
Financial experts, however, say that the question is not whether X is better than Y, but the better strategy is to make a diverse mix of X and Y, i.e., diversification is the key to high returns.
“The best investment strategy is a diversified one – across asset classes, within asset classes and among product types. Among fixed income investment options, there are a range of bonds with different yields and maturity and credit quality, bank deposits, debt mutual funds which invest in bonds and small savings etc,” says Dev.
