Small savings: The rationalisation continues

For investors in the small savings segment, Union Budget 2004-05 proved to be a windfall. Contrary to popular perception, returns on schemes like National Savings Certificate (NSC) and Public Provident Fund (PPF) were left unchanged. However recent amendments to the rules governing the small savings segment suggest that the rationalisation process is very much on; albeit the manner in which it is conducted has changed.
A recently passed notification states that only individuals can invest in schemes from the small savings segment. As a result, entities like trusts, Hindu Undivided Family (HUF) among others will henceforth not to be eligible to invest in any of the schemes. Effectively a significant population of prospective investors has been excluded from investing in the segment.
Small savings schemes have turned into a contentious issue for authorities in the recent times. The returns delivered by these investment avenues are independent of those from similar market-linked instruments. Recommendations by the Rakesh Mohan Committee which proposed linking returns on small savings schemes with those of yields on government securities of similar tenure have not found any takers. The present scenario suggests that factors other then economics are playing a role in decisions regarding the small savings segment.
The above amendment is perhaps indicative of how the character of the small savings segment will change going forward. While rationalising returns (read reducing interest rates) can be a touchy issue; changing the eligibility norms for investments can help authorities achieve the same results in an inconspicuous manner. Few would dispute the claim that servicing small savings schemes causes severe fiscal stress to the government. By barring a section of investors from participating in the scheme, the government has taken a step towards reducing its financial burden.
We at Personalfn have been strong advocates of a more rational structure for the small savings segment. We have always believed that a mechanism which contradicts the risk-return trade off (i.e. one which offers attractive returns at a low risk) is an unsustainable one and not in the long-term interest of investors. Any step towards correcting this anomaly needs to be applauded.
Our advice to investors - acknowledge the new dynamics of investing. Accept the fact that low risk investment avenues are unlikely to yield attractive returns going forward; at least not for the entire investing universe. Seek professional advice and gear up for the new investment scenario.