Small savings schemes no longer remain as popular as before, but is it time to dump them in favour of more lucrative schemes like MFs and ELSS?
Mutual funds (MFs) have become a big draw among investors. However, that seems to have happened at the cost of small savings schemes like the Public Provident Fund (PPF), NSC, KVP, MIS, and term deposits, among others, which have been losing their sheen fast, as per the latest Reserve Bank of India (RBI) data. For instance, in the first 8 months of FY 2017-18 between April 2017 and November 2017, receipts within small savings schemes amounted to Rs 40,429 crore as against Rs 275,682 cr recorded in the corresponding period of the previous fiscal. Even the total PPF receipts stood at Rs 1,775 cr as against Rs 5,722 cr received in the same period last year.
So, what does it mean? Small savings schemes no longer remain as popular as before and is it time to dump them in favour of more lucrative options like MFs and ELSS?
Financial experts say that ever since the linking of interest rates of small savings schemes (SSS) with government bond yields in April 2016, small savings schemes have registered a steady decline in their interest rates. On the other hand, “equity mutual funds have registered spectacular returns over the same period. For example, while PPF rates have come down from 8.7% in March 2016 to 7.6% now, many large cap funds have generated over 15% annualised returns over the same period. Mid-cap funds as a category have registered even higher returns with some clocking annualised returns of over 20% over the last two-year period. This has encouraged retail investors to divert their fresh investments from small savings schemes to equity mutual funds,” says Naveen Kukreja, CEO & Co-founder, Paisabazaar.com.
Moreover, AMFI and SEBI have also played a major role in popularising mutual funds among retail investors. While AMFI has run a sustained consumer awareness program to attract fresh investors, SEBI has incentivised mutual fund houses to increase their penetration beyond Tier I and Tier II cities by allowing higher total expense ratio for investments sourced from such locations.
“The reasons for the gaining popularity of mutual funds over the last few years are the brilliant returns generated from the stock markets by the equity schemes plus sustained marketing and distribution efforts from the industry. In contrast to the small saving schemes offering fixed but low single digit returns, the mutual fund schemes, especially the equity ones, have generated double digit annualised returns over the last 5 years,” says Ashish Kapur, CEO, Invest Shoppe India Ltd.
Also, mutual funds are by and large private sector players and push their products through regular advertisements on television and other media channels. There is also a robust distribution network of independent financial advisors, banks, brokers and financial analysts soliciting business for mutual funds and also servicing their clients. Compared to this, small saving schemes promoted by the government have no organised distribution channels and very little promotion efforts.
However, “while mutual funds have been doing well, one must remember that their returns are neither fixed nor guaranteed. Depending upon the unique risk profile of any investor, he/she needs to have a financial plan and accordingly invest appropriate amounts in fixed income small saving schemes as well as mutual funds. Both mutual funds as well as small saving schemes have their advantages and limitations. Their allocation in any individual portfolio should be determined after a careful analysis of return expectations and risk tolerance of the particular investor,” says Kapur.
Financial experts say that from an investor’s perspective, return is surely one factor. For example, mutual funds have in the past given better returns than small saving schemes (SSSs) and with recent cuts in the SSS rates, MFs have become even more attractive. “Other than returns, liquidity is a main concern as small saving schemes have a high lock-in period when compared to MFs. For instance, ELSS funds have a minimum lock-in of only 3 years, which is way lesser than PPF or Sukanya Samriddhi Yojana. Some open-ended liquid, equity and short-term debt funds have no lock-in period and funds can be withdrawn whenever needed, but they may have exit loads and tax implications,” says Adhil Shetty, CEO, Bankbazaar.com.
However, MFs may not be for everyone, especially if you are investing money that you cannot afford to risk at all. “MFs are based on market movement unlike SSSs which give you a guaranteed principal amount with stable returns unless withdrawn prematurely. So, it depends on the intention behind your saving and how much risk you are willing to attach to it,” says Shetty.
You also need to remember that small savings schemes are the safest of all investment options as they are backed by the sovereign guarantee. Many of them also come with attractive tax incentives for their investors. Hence, risk-averse investors wishing to keep a part of their long-term portfolio in fixed income securities should consider small savings schemes for their portfolio.