Rise in rates for small saving schemes should not necessarily mean increasing your allocation.
Kartik Jhaveri of Transcend Consulting says government's small saving schemes form only a tiny part of most of his clients' debt portfolio. For, most of these have a very long maturity period and are illiquid. Therefore, the changes brought in these schemes, via the government's announcement last week of higher interest rates, do not make much difference.
"Most individuals are looking to create wealth. And, these schemes have little or no role to play there," explains Jhaveri.
| HOW THEY COMPARE | ||
| Maturity | Scheme | Returns (%) |
| 15 years | PPF | 8.60 |
| EPF | 9.50 | |
| 5 years | NSC | 8.40 |
| Bank fixed deposit |
9.25* | |
account
Most of the government schemes have a long lock-in and a even longer maturity period. For instance, a National Saving Certificate (NSC) matures in five years. You cannot withdraw mid-way from this account, thus making the instrument illiquid. The good part here is that the maturity period has been reduced by a year and the interest raised 0.4 per cent, to 8.4 per cent, last week.
In comparison, State Bank of India's five-year fixed deposits pay 9.25 per cent annually. And, you can withdraw from these, typically, for a one per cent penalty. Say you want to withdraw after two years instead of five; you'll get one per cent less on the interest payable. Returns from both NSC and bank fixed deposits are added to your income and taxed on the applicable slab.
"Hence, bond funds or dynamic funds work better," says Jhaveri. As the interest rate cycle is expected to reverse soon, many suggest long-term debt funds. According to Value Research, gilt funds (medium and long-term) have given nearly six per cent annually in five years, as on November 11.
PPF, PF
On the Public Provident Fund (PPF), a tax-free return of 8.6 per cent is welcome. As a result, PPF forms a part of debt allocation for many individuals. But, financial planners fear that equity-wary investors may take this opportunity to move away further and invest more in high-yielding small saving schemes.
A report by Parag Parikh Financial Services says, "This change does not mean you should undertake any wholesale recast of your small saving schemes' portfolio. While you have been granted greater latitude through the hike in PPF investment ceiling to Rs 1 lakh, it is imprudent to exhaust your entire Section 80C limit only through this vehicle."
The increase in PPF limit under Section 80C, coupled with the likely withdrawal of Section 80C benefit for equity-linked savings scheme (ELSS) funds (from the coming Direct Taxes Code), will induce investors to skew their portfolios further in favour of debt and away from equity for the purpose of saving taxes, the report says.
Investment experts say if you are contributing towards Employee Provident Fund (earning 9.5 per cent, completely tax free), you need not put money in PPF. The latter is advisable for the self-employed and consultants.
OTHERS
As for the Post Office Monthly Income Scheme (MIS), certified financial planner Pankaj Mathpal says the changes will bring the net yield down. "Earlier, MIS would pay eight per cent yearly (payable every month) and if you stayed invested till maturity, you would get a five per cent bonus. But, with the hike in interest, the bonus has been done away with," he explains. The returns have been raised by 0.2 per cent.
This is more liquid than other small saving schemes, as you could withdraw after one year but before three years at a discount (deduction from deposit) of two per cent of the deposit, and after three years at a discount of one per cent.
In comparison, monthly income plans from asset management companies that invest up to 25 per cent in equities and the rest in debt not only protect your downside, but also give an equity or growth booster. Value Research finds debt-oriented (conservative) hybrid funds have returned 7.27 per cent in the past five years. These schemes are a good option for those looking at conserving wealth, such as retirees or those nearing retirement.
