Returns on small savings remain attractive despite no rate reviews

Investors who want to avoid their long lock-in can choose from a host of other high credit quality options

On June 30, the government decided to leave interest rates on Small Saving Schemes (SSS) unchanged. Expectations that the rates would be reset upward amid a rising interest-rate environment were high. Investors need to evaluate how they stack up against other high credit quality fixed-income options before putting money in them.

Returns still attractive

Experts say the returns of some SSS still remain attractive. “A few schemes like Public Provident Fund (PPF) and Sukanya Samriddhi Yojana (SSY) still look attractive as they offer tax deduction. Interest income from them is also tax exempt,” says Pankaj Mathpal, managing director, Optima Money Managers.

SSS returns look better than those offered by bank fixed deposits (FDs). For example, National Savings Certificates (NSC), which have a five-year tenure, offer 6.8 per cent along with Section 80C deduction. This is a better option than the 5.5-6 per cent being offered by five-year tax saving bank FDs.

However, advisors say one needs to take a holistic view when comparing these instruments. “While comparing SSS rates with bank FDs, consider two points: tax efficiency and lock-in period. SSS like PPF enjoy tax benefits which make their post-tax yield significantly better than bank FD rates. However, such investments typically have a long lock-in period. For example, withdrawals from PPF are permitted only after year five. An investor who may need money in the near future, or who wants to park funds for personal emergencies, may consider bank FDs,” says Vibhor Mittal, chief business officer, fixed income, (YubiInvest), Yubi (formerly CredAvenue).

Corporate FD rates on the upswing

FDs issued by quality corporates, typically with AAA ratings, are available at attractive interest rates. Bajaj Finance, for instance, recently hiked its interest rates to 6.2 per cent on one-year and 7.4 per cent on three-year FDs. AA+ rated FDs are even more attractive. For similar tenures, Shriram Transport Finance offers 6.5 per cent and 7.75 per cent respectively.
 

“Given their track record and higher rates compared to other products, offerings from companies like Bajaj Finance and Shriram Transport are attractive options,” says Anup Bhaiya, founder and managing director, Money Honey Financial Services.

However, they can’t compare with SSS on credit quality, as the latter enjoy sovereign backing.  

Check out government debt

Conservative investors may also shop for government securities (G-Secs), state development loans (SDLs), and treasury bills from the RBI Retail Direct website. These carry zero credit risk. Currently, 364-day treasury bills are offering a yield of 6.28 per cent. 91- and 182-day treasury bills are also available. One- to two-year G-Secs are currently offering a yield of around 6.5 per cent, while five-year G-Secs are offering around 7.1 per cent.

While the interest rates on FDs and G-Secs are turning attractive, investors in the higher tax slabs may not want to invest in them, as interest from them gets taxed at the marginal tax rate.

Debt fund yields are improving

Investors may also consider debt funds that invest in quality bonds. Corporate debt funds invest in bonds issued by corporate entities with AA+ and AAA ratings. On May 31, corporate bond funds were offering an average yield to maturity of 6.54 per cent. An expense ratio of around half percentage point leaves the investor with around 6 per cent expected return.

Investors may also consider target maturity funds maturing in four-five years. They invest in G-Secs, SDLs, and bonds issued by quality PSUs. “Select debt funds whose average maturity is in line with your investment horizon. Consider money market and short-duration funds for a shorter investment horizon, floating-rate funds for the medium term, and banking and PSU funds for the long term,” says Mathpal.

Gains on the sale of debt fund units held for three years are treated as long-term capital gains and are taxed at 20 per cent post indexation, which makes them attractive for investors in the higher tax brackets.

With interest rates still rising, avoid longer-duration funds.