Small Savings in Your Tomorrow's Portfolio

Now that small savings rates have been linked to government securities and has thus become market-linked, the role it plays in people's investment portfolio will change over time. Once you are not sure of what you will get at the end of the day as will be the case with long-term options such as Public Provident Fund, you will also start looking at the risk-return equation in fixed income investments unlike the past. Before, you could put money in a government-backed scheme with tax-breaks and chill out. Not any more. In fact, the small savings regime harks back to the very late 60's and early 70's when India desperately needed to mobilise savings, something that got a boost from the bank nationalisation in 1969. Now, that is not the case with people's incomes increasing much faster than expenses when you compare it with that period. As has always happened in case of other kinds of subsidies, the interest rate subsidy for small savings has gone mostly to people who least needed it. I have a PPF account. I am sure that a rural self-employed needs it more than me.  In fact, I should be barred from having an account. Maybe I should have fun till it lasts.

But coming back to the role of small savings in tomorrow's portfolio, if the Direct Taxes Code does what it should do i.e. reduce tax leakage routes, then people would only invest it to a limit as the overall portfolio returns will suffer. Being market linked, it will not be able to generate high returns at practically no risk since these investment options are government backed. People are likely to consider other options with equal or slightly higher risk. Unless mutual funds and other alternates make themselves available to people, something that should have been done long ago instead of banking on corporate money for their debt funds, we will see bank and corporate deposits getting more popular. Bonds will get more popular too. If you need proof, check out dicussions on people's portfolios in US and British personal finance books.   

Now Italy, Next France?

Well, the whole eurozone mess is broadly playing out according to the sequence people like me had expected. After Greece, attention had to go to Italy, the larger and vulnerable European country, though the mess in Greece is far from over. For a country with so many coalation governments since World War II, I am constantly amazed to see how much Italy has acutally achieved economically. But now with the kind of prime minister it has and the kind of political squabbling that is expected, it is keeping global markets on the edge. If things get worse, it's France's turn. While most European countries have flouted the fiscal norms for eurozone, including Germany, perhaps countries like Italy and Greece just went over the top. If things get bad in Europe, we are talking about more forex flowing out of India, rupee depreciating, imports getting costlier and inflation fire getting some more pumping. Then how can we expect RBI not to raise interest rates in December, 2011? Well, looks like its a better idea to talk about the weather. Darn! The weather in Delhi is also not good. There you go.