Post office Saving Schemes- Will they still be attractive after getting linked to market rates?


Post office schemes were often considered as the most favourite investment vehicle by our parents and grandparents who believed in safety of their investment as well as guaranteed returns. We too are following their footsteps and are investing at least a portion of our income in these small saving schemes.


But, things can change......

A government panel headed by RBI’s deputy governor Shyamala Gopinath has submitted a report to Finance Minister Pranab Mukherjee for several changes in the structure of these small savings schemes. The recommendations include-

Currently, instruments such as Public Provident Fund(PPF), National Savings Certificates (NSCs) and Senior Citizen Saving Scheme(SCSS) come under the fixed return category as their interest rates are administered by the Central government and remain more or less constant for years together.  But now as per the recommendations all instruments falling under National Small Savings Scheme (NSSS), including post office savings account deposits, will be linked to the market in a controlled manner.

PPF, the most popular scheme, would see interest rate rise by 20 basis points (100 basis points = one percentage point) to 8.2% annually instead of 8% p.a. now while senior citizens can hope to get 8.95% p.a.

Maximum investment limit in PPF
to be raised from Rs 70,000/- to Rs 1,00,000/-.

Premature withdrawals from PPF will suffer a cut of 2% from the prevailing rates.

KVP (Kisan Vikas Patra) scheme of post office which doubled the money in 8yrs and 7month will be discontinued.

And for the other schemes – the Monthly Income Scheme (MIS) and the National Savings Certificate (NSC) – the rates would remain the same but their tenure would be cut from six years to five.

A new NSC of 10-year maturity period also to be introduced.

In order to align the postal savings deposit rate to the bank savings deposit rate, the committee has recommended increasing the rate of interest from 3.5% to 4%.

Now that we know the new recommendations, let us try and understand whether these changes are going to be really advantageous to a common investor-

Firstly, Small savings scheme are meant for conservative investors with smaller savings who absolutely look at some guaranteed returns. But if small savings also become market-linked then the guarantee factor will no longer exist which means that there is no point of having long lock-in tenures. An investor would rather invest in FMPs (fixed maturity plans) or mutual funds to achieve much better returns.

The purpose and the essence of these small saving schemes, is to provide fixed returns, safety and security to investment. Linking it to market returns initially may sound great but in the long run, the fluctuations in the rates may affect small investors. Also in a falling market rates scenario, these rates too will fall.

Bank fixed deposits would continue to remain more attractive for investors than long-term deposits under small savings schemes of post office as the banks are providing much better interest on fixed deposits and are already market linked.

Since these are just recommendations as of now, it’s still to be seen what happens finally. But, this proposal definitely indicates the urgency to make a personal financial plan as one can no more rely on schemes like PPF to fulfil the long term goals like retirement. Instead of getting tempted with the higher interest rates let us try and fulfil our goals by following a systematic financial plan that would take care of the increasing volatility of different investment vehicles.

By Disha Keyur Shah
The writer is working with as a para-planner


0 #2 Minaxi Bhansali 2011-06-16 13:57
truely an eye-opener....i have been investing regularly in post office schemes..but now i rather think of making a financial plan
0 #1 Rashi shah 2011-06-16 11:27
thank you for the updates.
n very well explained

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