Personal finance: Return of small saving schemes

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With volatile equity markets and high inflation, deposits into the PPFs and other small saving schemes are beginning to rise. With volatile equity markets and high inflation, deposits into the PPFs and other small saving schemes are beginning to rise.
SummaryPPF deposits, saving deposits and certificates witness a revival, thanks to the volatile markets.

In the time of volatile stock markets and high inflation, deposits into the public provident funds and other small saving schemes have once again begun to register a rise.

In fact between April and December 2013, deposits into the public provident fund grew to Rs 1,391.43 crore as against Rs 1,169.12 crore a year ago, according to data released by the Controller General of Accounts.

More importantly, contributions to saving deposits and certificates too have witnessed a revival after a steady erosion over the past few years. CGA data revealed that these contributions to these schemes jumped up to Rs 1,732.88 crore in the first three quarters of this fiscal, compared to net withdrawals of Rs 460 crore a year ago.

The finance ministry is also hopeful that the full year target for Rs 7,820.02 crore from PPF contributions is also likely to be met. “There has been a resurgence in small saving schemes such as the PPF over the last few due to high inflation that has made fixed deposits relatively unattractive,” pointed out a senior government official.

The returns on these instruments, which were once seen by investors as their greatest drawback, is now being considered by investors as safe and stead, the official argued.

While the vastly popular PPF offers an interest rate of 8.7 per cent, the 10-year National Savings Certificate has a return of 8.8 per cent and even plain vanilla products like the one year time deposit offer a return of 8.2 per cent this fiscal. Along with this, the schemes also have hefty tax benefits.

Part of this change in investor sentiment are the lack of investment opportunities. While equity markets can be volatile and bearish, high inflation levels have eaten into returns on fixed deposits.

But the bigger draw for small saving schemes has been the finance ministry’s recent move to benchmark the interest rate to those of government securities of a similar maturity along with a mark up of 25 basis points.

The move followed the recommendation of the former RBI deputy governor Shyamala Gopinath committee that was set up to review the structure of the National Small Savings Fund. Based on its report in November 2011, the finance ministry now revises the rates of small savings schemes and notifies them on April 1, every year.

The committee also suggested winding up of the Kisan Vikas Patrika and hiking the annual investment limit for the popular Public Provident Fund (PPF) be raised to Rs 1 lakh from the earlier Rs 70,000 per year.

While the report was from the public finance perspective and not really from that of small investors, officials and analysts believe that it has given a boost to such schemes. “The long term objective was always to have market determined rates for such schemes,” pointed out the official.

An earlier committee set up under former RBI deputy governor Rakesh Mohan had also suggested aligning the administered rates on such schemes with market rates. The report was submitted in June 2004 to the finance ministry and some of its recommendations such as scrapping of the erstwhile 6.5 per cent (Tax Free) government of India bonds and deposit schemes for retiring government and public sector employees were implemented.

However, other suggestions such as discontinuation of the National Savings Certificate were not taken up for implementation.

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