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Hike In Small Savings Returns A Boost, But Is It Enough?

Adhil Shetty



The Central Government has increased the rates of returns on various small savings schemes by 0.3% to 0.4% for the quarter starting October 1, 2018.

Boost To Common Man

The increase in the interest rates comes as a boost to the common man. In recent months, the RBI-controlled repo rate has risen in tandem with the rate of inflation. The common man has been strained by rising inflation at a point. Borrowing has become more expensive. This was also at a point when returns from small savings were trending low, with many schemes such as the PPF returning less than 8% for the first time in several decades.

Scheme Name New Earlier
Post Office Savings Account 4.00% 4.00%
Post Office Term Deposits (1 Year) 6.90% 6.60%
Post Office Term Deposits (2 Years) 7.00% 6.70%
Post Office Term Deposits (3 Years) 7.20% 6.90%
5 Years Post Office Recurring Deposit 7.30% 6.90%
Kisan Vikas Patra 7.70% 7.30%
Post Office Term Deposits (5 Years) 7.80% 7.40%
Public Provident Fund 8.00% 7.60%
National Savings Certificate 8.00% 7.60%
Sukanya Samriddhi Scheme 8.50% 8.10%
Senior Citizens Savings Scheme 8.70% 8.30%

Is It Enough?

It may be noted that the repo rate has increased by 50 basis points in the last two revision cycles, whereas the interest rates on small savings have increased only by 40 basis points. Investors may find that in some cases, their returns from fixed-income instruments and small savings may not be enough to beat inflation. It’s advisable to invest in tax-efficient instruments such as PPF and SSS because your returns are tax-free and therefore your absolute returns are higher in comparison to returns from other schemes.

Go Beyond Small Savings For Wealth Creation

While the increase in interest rates for debt instruments such as the PPF is an encouraging sign, you should always look to include equity mutual funds in your portfolio, particularly over the long term. Debt holdings add the element of stability to your portfolio, but equity mutual funds provide you the best chance for wealth creation over the long term, surpassing the prevalent inflation rate. If you choose to periodically invest in them via a Systematic Investment Plan (SIP), you can also benefit from rupee cost averaging and override near term volatility. Open-ended Mutual Funds also do not have lock-in periods or maturity durations – often the bane of traditional investment instruments – therefore it’s easy for you to liquidate your mutual fund investment whenever you’re in need of your own money.

Difference In Returns

The long-term returns from a PPF account could be substantially lower from those earned from a high-performing mutual fund. At the current rate of 8% over 15 years, Rs. 150,000 invested in PPF will return Rs. 45.5 lakh. However, the same amount of Rs. 150,000 broken into 12 equal monthly installments of Rs. 12,500 each and invested via an SIP in an equity mutual fund with returns expectation of 12% per annum will return Rs. 63.1 lakh (or Rs. 84.6 lakh with returns expectation of 15% per annum.)

The writer is CEO, BankBazaar.

BankBazaar.com is a leading online marketplace in India that helps consumers compare and apply for credit cardpersonal loanhome loancar loan, and insurance.