Small saving schemes are the most popular investment avenues among the general public. Safety, convenience, small investment and liquidity characterize these investments.
The high safety levels coupled with the attractive returns make small savings schemes a ‘must-have’ proposition for most investors.
A large section of Indian households still solely rely on Small Savings Schemes for their investments. However, these schemes also offer a good portfolio diversification opportunity for people investing in riskier investments.
Given below are some small savings schemes that are currently available in India.
- Public Provident Fund
- National Saving Certificates
- Government of India 8% Savings Bonds (Taxable)
- Post Office Savings Schemes
- Kisan Vikas Patra
- Senior Citizen’s Savings Scheme
- Monthly Income Scheme
- Time Deposits
- Recurring Deposit Scheme
- Post Office SB Accounts
Main reasons why Small Savings Schemes enjoy high degree of trust by the general public are as listed below:
Small savings schemes are Government operated
All these small savings schemes are operated either directly by the government or a government organization (post office or nationalized banks) and are, therefore, very safe. The government can be expected to always honour its commitments. The procedures of making deposits and withdrawing money, whether upon maturity or earlier, are fairly streamlined. With these savings schemes, timely payment of interest
and repayment at maturity is assured.
Small savings schemes offer Tax benefits
All these small saving schemes are entitled to some tax benefits like income tax, wealth tax, etc. The actual quantum of benefit varies from scheme to scheme. In fact, it is mainly these tax benefits which attract people to invest in these schemes. The rate of return on these instruments is fixed and is usually not very high. These schemes are often advantageous for those who look for a steady stream of fixed income and want 100% risk-free investment.
Small savings schemes have wider accessibility
As the minimum investment limit in some schemes range from Rs.10 to Rs.100, even a person with very low monthly savings can participate in these schemes. An added advantage is the fact that since most of these schemes are operated through post offices and nationalized banks, they are easily accessible to the small investors everywhere.
Small savings schemes have attractive returns
On some savings schemes, returns which are somewhat higher than the interest on bank deposits or dividend yield on units. Some schemes even offer a totally tax-free income. Post tax return of some schemes are quite attractive compared to company deposits.
Liquidity of Small savings schemes
Most of these schemes have a provision for premature withdrawal which increases the liquidity of investment. Further, banks extend loans against the security of these saving certificates and the interest charged at a comparatively lower rate of interest.
Small savings schemes have various Maturity options
These schemes offer a wide choice of maturity, ranging from short period to long period of fifteen years. It is easy, therefore, to choose a saving scheme according to the requirements.
Small savings schemes offer Low Risk investments
No scheme offers ‘zero risk’ investment . The small saving schemes are no exception to this general rule. Although, the principal amount is secured, these schemes are exposed to inflation risk.
The over-reliance of Indian households on Small Savings Schemes was mainly due to tax benefits and risk-free returns on investments. However, risk-free returns are fast becoming history. In a deregulated interest rates scenario, risk-free instruments will fetch the lowest returns, and you can ill-afford to count on them alone to reach long-term financial objectives such as retirement.
So, if you had only small savings schemes in your investment portfolio, diversify by investing in riskier investments such as Mutual funds and pension funds. You cannot avoid risk any more; you’ll need to manage it.
If you had absolutely no investment in Small savings schemes, then too you are exposed to even greater risk. Diversify your portfolio with safer investments like these small savings schemes.