Investing All My Money in Small Savings Schemes is good?

Small savings schemes are a big success because they offer security and tax benefits. Read this article to find out how much would be the ideal allocation in small savings schemes.

The terms - government-backing and guaranteed - have attributed to the wide popularity of small savings schemes. In India, these schemes are an important source of household savings. There is large-scale participation of the general public through different small saving schemes, initiated by the central government. They can be opted for through post offices and branches of public sector banks and select private sector banks. Allocating a part of one’s investment portfolio toward small savings instrument is always a wise call.

This article looks into how much an individual must put into these schemes. But first, let us understand the different types of small savings schemes available in the market.

Some of the top small saving schemes available in the market are as follows:

• Public Provident Fund: PPF is a long-term investment option, which offers safety with attractive interest rate and returns that are completely exempt from tax. Investors can benefit from facilities like loan, premature withdrawal and extension of account through PPF deposits.
• Post Office Monthly Income Scheme: POMIS offers monthly interest payment to investors. The scheme - introduced by the Indian Postal service - has a tenure of five years. Depositors can benefit from premature withdrawal facility, which is available after the completion of one year after paying a penal amount.
• Senior Citizen Savings Scheme: Launched in 2004, SCSS is one of the simplest investment options for individuals above the age of 60 years. Among the various small savings schemes, SCSS typically offers the highest rate of interest.
• Sukanya Samriddhi Yojana: This scheme is intended to help parents save for the financial goals of their girl child from the beginning itself. The girl child must be below 10 years at the time of account opening. The account shall be operative for 21 years (from the date of its opening) or till her marriage after she turns 18.
• National Savings Certificate: NSC is a savings bond that encourages subscribers, primarily small and mid-income investors, to invest while saving on tax. It offers complete capital protection and guaranteed interest. However, like many fixed income schemes, NSC cannot deliver inflation-beating returns.

Small saving schemes are best-suited for investors whose risk profile is low and seek returns to the tune of 4% to 8.6%. Individuals who do not do not want to invest large sums and risk their investment can consider such schemes to grow their wealth. However, it is essential to note that investments in small savings schemes are kind of illiquid, which means that in the event of an emergency there are certain limits on withdrawal.

Besides the benefit of low risk and guaranteed returns, some of the small savings schemes allow for various tax benefits to be claimed. Under Public Provident Fund and National Savings Scheme, for instance, individuals can claim tax deduction under Section 80C of the Income Tax Act, 1961, for the investments made. The maximum cap here is Rs. 1.5 lakhs. Additionally, the interest accrued and the proceeds received on maturity/withdrawal are tax-free. Therefore, entities looking to save tax can also consider investing in some of the small savings schemes.

It has been observed that during market downturns, small saving instruments have emerged as a viable financial planning tool. They are low on volatility and can give guaranteed returns as per the promised interest rates. This, however, does not mean that small savings should be the sole investment. It is always best to have a diversified portfolio i.e. invest in small saving schemes along with other yielding investments, as per the individual’s life goals. Including equities and debts (based on the investor’s risk profile) can add tremendous value to one’s portfolio, thus optimizing the returns potential.

Investing in small savings scheme is both safe and rewarding. Individuals can be assured of the returns as these investments are government-backed. However, it is advisable to not put all the money in savings schemes alone. The ideal asset allocation should be a mix of aggressive and safe investments. While it is not possible to eliminate volatility, it is possible to neutralise its impact on one’s goals by assigning riskier investments like equity to long-term goals.