Investors choosing the Public Provident Fund (PPF) as their tax-saving option are generally risk-averse persons. However, the sovereign guarantee, higher interest rate than the prevailing FD interest rates, tax-free interest and no tax on the amount received on maturity often lure risk takers also to take advantage of it.
As safety of the investment is the primary advantage of PPF, investors looking for other investment options to park their maturity money instead of extending their PPF account for another five years would look for getting some additional return without taking much risks.
Although Fixed Deposits are safe, inferior and taxable returns make them unattractive.
The other option is Mutual Fund (MF). Without their exposure to equity markets, debt mutual funds are considered less volatile than equity-oriented funds.
However, the low interest rate regime along with the fact that banks are sitting on surplus cash have pushed the rate of return on short-term debt funds. So, such investors need to select the longer term debt funds and may face duration risk and some default risks unless proper evaluation is done before investing.
Despite having market risks, PPF investors – having 5-year investment horizon – may try equity funds.
High lock-in period of PPF: How long does a nominee need to wait to get money?
“PPF investors with higher risk appetite and hoping to extend existing PPF A/c for 5 years or beyond can consider investing in equity mutual funds. Despite the inherent volatility in equities, returns generated from equities as an asset class usually beats those generated by fixed income instruments, including PPF, NSC, etc backed by sovereign guarantee, by a wide margin over the long term,” says Sahil Arora – Senior Director, Paisabazaar.com.
“Such investors may distribute their equity investments among large-cap, mid-cap, large- and mid- cap, small cap, flexi cap, focused funds or sector/thematic funds depending on their risk appetite and preferred investment strategies,” he suggests.
“Those investing in PPF to avail tax deduction under Section 80C can invest in Equity Linked Savings Schemes (ELSS). These tax-saving mutual funds usually follow flexi cap approach and have the shortest lock-in period of 3 years among all investment instruments qualifying for tax deduction under Section 80C,” Arora further says.
The other options such investors may also try are the funds investing in different asset categories – like, BAF (Balanced Advantage Fund) that invests in both equity and debt, AAF (Asset Allocation Fund) that invests in different financial assets and MAAF (Multi Asset Allocation Fund) that diversifies further by inducting gold, real estate, international funds etc in its portfolio.
