Falling interest rates on traditional savings products like fixed deposits and the need to build a safety net due to the pandemic have led to the turn to small savings products, which remain attractive due to the high returns they offer and the compounding effect.
For example, in 2021-22, savings deposits are projected to grow at 21.8%, up from 8.8% in the previous year, while certificates (like NSCs) are also projected to grow by 21.2%. According to figures in financial, budget documents (see graphic), up from 11.8% in the previous year.
Experts attributed the increase in investment in these schemes to the quest for better returns. “Investors coming into fixed-income products mainly market-linked debt mainly due to lower returns on mutual funds.
Volatility only increases with mark-to-market (mtm) effect due to increase in interest rates. However, if you hold true to your holding period then run-down maturity products provide you the return you would be able to earn, provided you hold till maturity. Investors can look at these products in a detailed manner over the next six-eight months,” said the financial planner Surya Bhatia,
Government officials said investment in small savings schemes is expected to be higher this year and is expected to decrease next year with the increase in FD rates. The RBI has pointed to higher rates as an impediment to its ability to reduce overall rates and favored rationalization of returns on these schemes.
“This year, we expect around Rs 6” lakh crore Why the inflow? But in a normal year it is in the order of Rs 3-4 lakh crore and in 2022-23 we expect an inflow of around Rs 4.25 lakh crore, in view of the fact that people will take other investment avenues equally. You will find it attractive. But if it doesn’t, the market borrowing will go down.” Ajay Seth, Economic Affairs Secretary, told TOI in an interview. The Center has kept the interest rate for these schemes unchanged for seven quarters. The 5-year post office scheme offers an interest rate of 6.7%, while the PPF offers a return of 7.1%.
“The growth in small savings collections this fiscal has ensured that the net borrowing of the government remains within reasonable limits and is even lower than the budget estimates. In the current financial year, the government has significantly reduced the small savings collection in the budget. The jury is still out on whether small thrift collections will continue to be attractive,” said Soumya Kanti GhoshGroup Chief Economic Advisor at SBI.
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