Small saving scheme investors can look at NCDs, NPS Tier II

The government may not significantly cut rates on small savings schemes but there are other options one can look at

While the bonds yields have declined in the past three to six months, government may only marginally tinker with the interest rates on its small savings schemes in September.

“While the interest rates are now formula driven, the government would not revise it downwards in this quarter. If at all, there’s any change, it would not be significant,” says Arnav Pandya, a certified financial planner.

Pandya explained that the government had changed the way it calculates the interest on small savings schemes after banks said that they are unable to lower lending rates as they need to keep the fixed deposit (FD) rates high to be competitive with the small savings schemes. But banks have not made any meaningful changes since April. “If bank rates are better, the investments in small savings schemes would evaporate and the government would not like to lose these depositors to other schemes. This is why the government held on to rates in June,” says Pandya. 

 

State Bank of India (SBI) has lowered deposit rates from September 1 after a gap of five months. While the one-year SBI FD now fetches investor 7.15 per cent, the deposit rate for one year post office deposit is at 7.1 per cent. Interest rates on two-year SBI FD are 7.25 per cent whereas post office FD gives 7.2 per cent. It’s only in three-year and five-year deposits where small savings scheme fetches 40 basis points and 90 basis points higher.

Another reason why the government would not revise interest rates on small savings scheme is Goods and Services Tax (GST). “While the Centre collects these deposits, the money is passed on to states for various schemes. If there’s a drop in assets of small savings schemes, states may create problems in implementing GST – where the states are expected to lose revenues,” says Malhar Majumder, a certified financial planner.

It’s only in the long term schemes, like five-year deposits, senior citizen savings schemes, where the post office schemes’ rates are still higher. If the government lowers interest rates in these, wealth managers say that investors can look at the Non-Convertible Debentures (NCD) that finance companies are offering. DHFL, for example, is offering up to 9.25 per cent for its 7-year bonds. It is also offering bonds with 3-year and 5-year tenures with slightly lower yields but above nine per cent.

Another safer option that conservative investors can look at is National Pension Scheme’s Tier-II category. This category gives investors flexibility to withdraw money without any penalties. The investor can choose the mix of assets they desire and the fund manager. There is no limit on the number of times one can withdraw money from the NPS Tier 2 Account.

While company deposits are also attractive, wealth managers say that it’s better to stay away from them at this juncture. “There’s always looming risk of corporate default in company FDs. Small investors can therefore stick to safer options,” says Majumder.