PPF (Public Provident Fund) has always been the old war-horse of the middle class investors looking for high returns with low risks. And with the recent rate hike by the government on the small savings schemes, combined with the prospects of further rate hikes in this rising interest rate regime, PPF seems to have become more attractive. The question, however, arises: Is investing in PPF good enough for someone’s financial future or should one also consider other investment options like mutual funds or Ulips?
Financial experts say that PPF after the rate hike has certainly become a very good option for investors who have money available for long-term deployment. The rate (8% from October 1) is guaranteed by the government of India and is also tax free. “This is much better than what mutual fund debt schemes are generating on a post-tax basis. Moreover, mutual funds do not offer any downside protection,” says Ashish Kapur, CEO, Invest Shoppe India Ltd.
There are only two limitations to the case favouring the PPF investments. One is that PPF has a 15-year lock-in on its contributions. After 6 years, partial withdrawals are allowed. So, “only those investors with a very long holding period should put their money in PPF. Also, PPF has a maximum limit of Rs 1.5 lakh per person in any year. Therefore, any large sums of investment would have to partially be invested in mutual funds also,” informs Kapur.
Some financial experts, however, are of the view that it is not the nominal rate of interest which should be taken into consideration, but one should take into account the real rate of interest.
“With the rate of interest on PPF (Public Provident Fund) having gone up recently, people have been asking whether is has become a better product to invest? The real question, however, should be of the real rate of interest which one gets on such investments. As the interest rate curve has already reversed, the nominal interest rates will also go up as is evident from the yield on government securities and so will go up inflation, thus, maintaining the difference between the nominal rate and the real interest rates. The increased rate will be applicable for the next quarter and if the yield on government securities keeps going up, the PPF interest may also go up. However, as soon as the curve reverses, the interest rates on PPF will also reverse in due course,” says Balwant Jain, a tax and investment expert.
It is, therefore, not the question of either PPF or mutual fund investments through ELSS (Equity Linked Savings Scheme), but of how much. To ensure proper asset allocation and avail the tax benefits under Section 80C, one should allocate the amount of investments to be made between the ELSS and PPF. Depending on your age, risk profile, liquidity requirement you should allocate the investment between PPF and ELSS.
“The fact is, even after the imposition of 10% tax on equity funds under Section 112A, the investments made in ELSS are still more attractive provided one remains invested for a longer period in the ELSS as ELSS is basically an equity product and is risky for short duration. The risk involved with investing in equity due to its volatility gets evened out in the long run and thus ELSS may give you better returns in the long run even after taking into account the 10% tax on the long-term capital gains,” says Jain.
PPF Vs ELSS: Which will give better returns
Suppose one invests an equal amount in both PPF and ELSS, i.e. 75,000 every year in both the products. Presuming that the interest rate on PPF will remain fixed @ 8% for the next 15 years and the returns on ELSS will average 12% annualised for the next 15 years, you will be able to accumulate Rs 21,99,321/- in PPF and Rs 31,31,496/- in ELSS at the end of 15 years. Your principal investment in each of the instruments will be Rs 11,25,000/- during this period.
“Even after reducing the tax liability or Rs 2,00,650/- @ 10% on the profits of Rs 20,06,496/-, the net maturity value of ELSS will be Rs 29,30,846/-, which is 33% higher than the one accumulated in the PPF account,” informs Jain.
Thus, in case you are at the beginning of your career (therefore, have higher risk-taking ability and also have no liquidity requirements), then by investing in ELSS instead of PPF you will be able to generate 33% higher returns.
(Disclaimer: These are the views of the financial experts. Please consult your financial advisor before investing in any of the above-mentioned products)