Small Savings Schemes: Losing Their Shine?

With the fall in overall interest rate, we have seen a decline in rate of interest offered to various small saving schemes by the government. This will impact investors who depend on such schemes as part of their retirement plan or to meet certain financial goals

The equity markets witnessed a fall close to 39 per cent from its all-time high in just a matter of two months. However, it also recovered 42 per cent from the low. The spill-over of the equity market was reflected in the fixed income market also. One of the ways to arrest the fall in the equity market was to lower the interest rate by the apex bank in India. As such, the Reserve Bank of India (RBI) reduced the repo rate close to 115 basis points or 1.15 per cent. This created a wave of cheer in the debt market as interest rates continued to fall, which in turn boosted bond value.

With the fall in overall interest rate, we have seen a decline in rate of interest offered to various small savings schemes by the government. This fall, while it spelt good fortune for bond investors, did not go down too well with investors who have parked their savings in small savings schemes. Considering that small savings schemes are held till maturity, they are prone to interest rate and re-investment risk.


As can be seen from the above table, on almost all the popular small savings schemes, the interest rates have been drastically cut for the quarter ending June 2020. Therefore, investors investing predominantly in these avenues should get ready to earn a lot less compared to what they were used to earning. If the yields continue to fall, the rate of PPF would fall below 7 per cent. PPF has never spiralled downwards to such low levels in the past 46 years, i.e. since 1974. Those investing in Public Provident Fund (PPF) and Sukanya Samriddhi Yojana will be able to feel the impact instantly as these lower rates are also applicable on accumulated balance. PPF investors will now get 7.1 per cent compared to the earlier 7.9 per cent. And those parking money in Sukanya Samriddhi Yojana will earn 7.6 per cent compared to the earlier 8.4 per cent.

That said, investments made in National Savings Certificate (NSC), Senior Citizens’ Savings Scheme (SCSS), Kisan Vikas Patra (KVP), etc. prior to the announcement would be protected from the cut. Lower rates would be applicable for those investments that are starting from April 1, 2020. Therefore, people retiring now will feel the pain of the cut as the interest rate for SCSS has fallen from 8.6 per cent to 7.4 per cent and the NSC rate has taken a dip from 7.9 per cent to 6.8 per cent.

We might see investments starting to move to other debt instruments such as tax-free bonds, sovereign gold bonds or even to cash and debt mutual funds. With deposit rates falling so low, several investors are in a dilemma whether they should entirely shift their investment portfolio to mutual funds or continue to remain invested in small savings schemes.

As is evident from the above graph, the interest rate of small savings schemes has moved quite a bit in the past 16 quarters. Only the interest rate on savings account has remained constant. That apart, the interest rate on all other savings schemes has nosedived. A major fall was seen in the first quarter of FY 2020-21. This was due to the rate cut of 1.15 per cent by the RBI. It would be interesting to see how debt funds have moved in the same period.


Debt fund returns are quite volatile than those of small savings schemes. Debt funds have even yielded negative returns. However, they have given returns as high as 7.72 per cent. However, in Q1 of FY 2020-21, apart from credit risk funds, no other debt fund yielded negative returns. But still, despite a revision in interest rates of small savings schemes, they provided better returns than debt funds.

Here we need to remember that the taxation part has been ignored. If we take taxation into account, then apart from PPF interest, all the other small savings schemes are taxable as per individual slab rates. However, in case of debt funds, after three years the gain is taxed at 20 per cent with indexation benefit.



As seen in the above graph, most of the debt funds gave more than 10 per cent returns in one year on a trailing basis. However, they have also fallen below the small savings schemes’ rates. However, if we look at it in overall terms, then they have given better returns than small savings schemes.

Choosing the Right Option

With the falling interest rate scenario, many investors are confused as to whether to continue investing in small savings schemes after maturity or opt for debt mutual funds instead. This would depend on various things such as investment horizon, risk profile and financial goal. For example, if you wish to save for any of your financial needs such as child’s education, then for the debt part you can still rely on small savings schemes due to attractive interest rates. However, if you are an aggressive investor falling in the highest tax bracket or wish to invest for a longer period, investing in debt mutual funds makes more sense.

Even if you are an investor with a conservative risk profile, it is better to stay with small savings schemes as this would offer better protection against credit risk. However, such investors should remember that this won’t protect you against interest rate risk and re-investment risk. Further, while investing in debt mutual funds, it is important on your part to actively manage your debt fund portfolio. What this means is that based on the interest rate scenario and debt market dynamics, choose a duration fund that is suitable.

This may not be possible on your part due to many constraints such as time and knowledge. Therefore, for such investors, it is prudent to invest in dynamic bond funds as they manage the debt portfolio depending on the market scenario. Finally, if you are considering investing in small savings schemes or debt mutual funds then consider it as a debt part of your overall portfolio. It is advisable not to dedicate all your money to them. Rather, it would be better if you have a perfect blend of debt, equity and gold. This would not only protect you from downside risk but also help you in a rising market scenario.