Small Saving Schemes Interest Rates Kept Unchanged. How to Structure Your Fixed Income Portfolio?

Nov 13, 2021

Listen to Small Saving Schemes Interest Rates Kept Unchanged. How to Structure Your Fixed Income Portfolio?

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The government has decided to keep the interest rate on small saving schemes unchanged for October to December 2021 quarter. This is the sixth quarter in a row that interest rates on small saving schemes such as, Public Provident Fund, National Saving Certificate, and Sukanya Samriddhi Yojana have remained unchanged.

The government reviews and notifies the interest rates of small saving schemes on a quarterly basis. The interest rates on different small saving schemes are 25-100 basis points higher than the yield on government bonds of similar maturity. And since the yield on government bonds declined in calendar 2020, interest rate on small saving schemes also declined in June 2020 quarter. Despite this small saving schemes continue to offer attractive rates compared to bank deposits.

If you recall the government at the end of March 2021 had announced a sharp cut in interest rate of small saving schemes for the first quarter of FY 2021-22. However, it rolled back the order within 24 hours calling it an oversight. Since then the government has kept the interest rates unchanged.

Notably, RBI cut repo rate by 115 basis points between March 2020 and May 2020, to support economic growth amid the COVID-19 pandemic. As a result, most public and private sector banks have reduced interest rates on deposits by more than 100 basis points from pre-pandemic levels.

Small Saving Schemes Interest Rates Kept Unchanged. How to Structure Your Fixed Income Portfolio?
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Why has the government kept interest rate on Small Saving Schemes unchanged?

The deposits from small saving schemes are credited to the National Small Savings Fund. This fund is a key source for the government to finance its deficits and helps government to reduce its reliance on borrowings through extra budgetary resources (EBR) via public sector undertakings (PSUs). As government's receipts were muted due to the impact of the pandemic, its reliance on National Small Savings Fund is likely to grow.

Therefore, by keeping interest rates unchanged, the government wants to encourage investors to deposit more into these schemes.

It is important to note that the pandemic has also wreaked havoc on the finances of many individuals. Since many individuals in the low and middle income group typically invest in small saving schemes for the safety that it offers, the government has kept the interest rates at attractive level.

Table 1: Interest rates on Small Saving Schemes

Instrument Rate of interest Compounding frequency
Savings Deposit 4% Annually
1 Year Time Deposit 5.5% Quarterly
2 Year Time Deposit 5.5% Quarterly
3 Year Time Deposit 5.5% Quarterly
5 Year Time Deposit 6.7% Quarterly
5 Year Recurring Deposit 5.8% Quarterly
Senior Citizen Savings Scheme 7.4% Quarterly and paid
Monthly Income Account 6.6% Monthly and paid
National Savings Certificate 6.8% Annually
Public Provident Fund Scheme 7.1% Annually
Kisan Vikas Patra 6.9% Annually
Sukanya Samriddhi Yojana Account 7.6% Annually
Interest rates applicable for December 2021 quarter

Should you invest in Small Saving Schemes?

In the current market scenario where returns on other equity mutual funds are treading at an uncertain path due to expensive valuations and that of debt mutual fund are declining, small saving schemes are offering attractive and guaranteed returns at relatively lower risk.

It is important to note that the interest rates on Small Saving Schemes did not witness significant decline in line with the fall in yield on government bonds. Therefore, when the RBI starts increasing policy rates, the interest rates on small saving schemes may not see any increment as they are already at higher levels.

Moreover, most Small Saving Schemes have mandatory lock-in period which means that they score low on liquidity aspects.

That said, the low volatility, high safety, and assured return that small saving schemes offer make them an attractive investment proposition. But ensure that you make meaningful allocation to these schemes after considering the following aspects:

1. Its role in achieving your financial goals

2. Whether it will help you to achieve optimal diversification

3. Tax benefits

4. Liquidity

5. Eligibility criteria (Resident, Senior citizen, etc.)

6. Maximum annual investment limit in the scheme

7. Assess whether your investment horizon is in line with the lock-in period of the scheme

How should individuals dependent on fixed income instruments structure their portfolio?

If you are a retiree and are looking for safe avenues that can provide stable source of income, you can consider investing in fixed income schemes such as, Senior Citizen Saving Scheme, Pradhan Mantri Vyay Vandana Yojana, National Saving Certificate, etc. Other conservative investors can consider investing in Public Provident Fund, Post Office Deposits, etc.

[Read: Are Equity Savings Fund a Good Option for Retirees?]

However, do note that if you are entirely dependent on fixed income instruments such as small saving scheme, you may not be able to meet your retirement needs comfortably due to rising inflation.

Therefore, to earn relatively higher returns consider allocating assets to debt mutual funds. Choose from relatively safer debt mutual fund categories such as, Banking & PSU Debt FundsLiquid Funds, and other short duration debt funds. In addition, to accommodate the rising cost of living, it makes sense for retirees and other conservative investors to allocate 25%-30% of the investment pool to equities via Large-cap mutual funds and Aggressive Hybrid Funds.

And because Gold has proved its potential as an efficient portfolio diversifier, it makes sense to allocate some of your assets in it. Consider allocating 5%-10% of your investment portfolio in the segment, preferably via Sovereign Gold BondGold Exchange Traded Funds (ETFs) or Gold Savings Fund.

Table 2: Allocation to mutual funds for conservative investors

Asset Class Allocation
Banking & PSU Debt Fund ~70%
Liquid Fund
Large Cap Funds ~25%
Aggressive Hybrid Fund
Gold Fund ~5
Note: The table is for illustrative purpose only

Determine the allocation across equity, debt, and gold asset class by assessing whether you want to follow a conservative approach or are willing to take some risk. Rebalance your portfolio from time to time if an asset allocation drifts significantly from the initial allocation. By rebalancing your portfolio to your standard allocation, you will adjust the allocation of each asset class to their fair level.

When you choose debt mutual funds, be careful of the credit risk the fund manager is taking. Stick to debt funds that are safely managed and focus primarily on instruments issued by Government and Quasi-Government issuers. Remember, debt funds are not risk-free.

How conservative investors can earn regular income from Mutual Funds?

Systematic Withdrawal Plan (SWP) is an effective way to earn regular income from mutual funds. Through an SWP, you can withdraw a fixed sum of money from a mutual fund scheme regularly (monthly, quarterly, half-yearly or annually) and hold the potential to clock returns on the remaining investments over a period of time. It not only provides you with a fixed source of income, but also inculcates a disciplined approach while spending. Keep in mind that the withdrawals are subject to tax.

Following are the benefits of opting for SWP:

  • Facilitates better planning of withdrawals, as per your need

  • Enables rupee-cost averaging

  • The remaining investments/units would benefit from the power of compounding

  • Can be one of the effective ways to source your retirement needs

To conclude

Small Saving Schemes are an apt choice for retirees and other conservative investors but ensure that you invest sensibly after evaluating the benefits that the scheme has to offer and its suitability to your financial goals and investment horizon. In addition, diversify your investment to other avenues such as equity mutual fund, debt mutual fund, and gold to benefit from higher liquidity and to earn inflation-beating returns in the long run.


Warm Regards,
Divya Grover
Research Analyst


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