Here’s why you should include Small Savings Instruments in your financial plan
Over the years, India’s middle-class investors have been conveniently impressed by investment devices that help them accumulate more wealth in the shortest time. This explains the growing popularity of mutual funds over small saving schemes that were erstwhile very popular among Indians who display a low-risk appetite. Also, the interest received on small savings schemes has come down after they have been linked to government bonds with large-cap mutual funds giving investors a far higher annualized returns. But the economic downturn seems to have turned the tables. In a lean market, small saving instruments have emerged as a viable financial planning tool that is low on volatility and can give you guaranteed returns as per the interest rates promised. This, however, does not mean that small savings should be your only monetary mechanism. The tenet is to diversify the way you invest as per your life goals and opt for both small saving schemes along with other yielding investment methods.
With investments in small saving instruments such as PPF, NSC, Post Office Savings Deposit, etc sky-rocketing this year, we take a look at some of the reasons that make them a legitimate route to manage your money.
Related: PPF, SCSS, Post office saving scheme revised : Here’s what you should know
Fixed-rate small saving schemes are rewarding
If you’ve researched on small saving instruments, by now you would know that they are of two types viz fixed-rate products and variable products. Considering the current market dynamics, fixed-rate small saving products are ideal for investors from fixed-income brackets. In every quarter of the Financial Year, the government announces new interest rates. In a variable-rate investment scheme, the interest on the final corpus changes as per the new rate. However, this is not the case for a fixed-income product. The interest rate at the start of your investment will continue to be the same until the maturity of the bond. This offers a stable investment opportunity as it is free of risks and you can choose a scheme when the interest rates are high.
Ideal for low-income investors
For people who belong to a low-income category, finding the right investment method can sometimes be a task. Keeping aside a part of the income to build one’s savings is understandably difficult when the amount of money is sparse. This is where the relevance of small savings instruments come in. This form of investment helps you go about your daily needs and secure your future at the same time. Government-backed small saving instruments encourage small-income investors to invest to earn high returns and to save on income tax as well. The National Savings Certificate (NSC) is a fixed income saving instrument that is worth mentioning in this regard as it offers investors a fixed return and is ideal for people with low-risk appetite.
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Revised rates every financial quarter
Building up your cash reserves through small saving instruments means that your investments will be largely dependent on the revised rates that are announced in every quarter of the financial year. This could, however, be both positive and negative. These quarterly resets may cause investors to rethink their decisions but it also gives them a fair idea of whether their investment should be short-term, mid-term, or long-term. If we are to look at the latest quarterly reset (July-September 2019), we will discover that the rates have been reduced only by 10 points(0.1 percentage point). In some of the previous quarters, the rates have even been left untouched. While there can be no predictability over the rate-revision, it is usually observed that the government does not drastically lower rates because it is cautious of upsetting investors. At the end of the day, the rates that you are getting on these small savings instruments, are far better than many other investment options in the market.
More lucrative than tax-saving fixed deposits
In the current financial ecosystem, small saving instruments like Post Office Time Deposits are providing higher interest rates when compared to FDs offered by many popular banks. Added to it, small saving instruments also come with a sovereign guarantee, which is an added benefit for the Indian middle-class. Investors get optimum safety on the principal amount invested, with the interest being payable quarterly as per the prevalent income tax rates on one’s income. Thus, the risk profile of small saving instruments is extremely low.
Ideal for senior citizens
Small saving instruments like the Senior Citizens’ Saving Scheme is providing the older population with lucrative investment options. The current rate for this scheme is 8.7% per quarter, which means it will go a long way in providing senior citizens with interest every quarter, thereby providing them with a regular stream of income with the highest of safety and tax-saving benefits. This explains why small saving instruments are an apt choice of investment for those over 60 years of age. Learn how your savings can boost India’s growth.