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Even at 40-year-low returns, PPF a good investment avenue

Investors generally look at PPF as an alternative to fixed deposits

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Public provident fund (PPF) deposits will fetch 7.9% interest rate for the April-June quarter - the lowest interest rate in nearly 40 years. But that doesn't make PPF, the cornerstone of investment portfolio of crores of Indians, a bad choice. Personal finance experts tell DNA Money that currently, PPF is still one of the best, given its returns when compared to inflation and other competing products, its guaranteed nature of corpus, and favourable tax status.

Old is gold: Investors generally look at PPF as an alternative to fixed deposits (FDs). In the scenario of falling interest rates, FD's are offering an interest rate less than 7% p.a., where interest is fully taxable. On the other hand, PPF comes under the benefits of exempt-exempt-exempt (EEE), which means interest earned as well as withdrawals from PPF are tax-free. Anyone (salaried and non-salaried) can open PPF account, except for non-resident Indians, and can get tax benefits on investments upto Rs 1.5 lakh every financial year.

"So investor who is looking for guaranteed returns with tax benefits can still keep PPF as one of the options to save tax. Apart from PPF, if salaried-class investor looking for another safe investment options, they can increase their monthly contribution in Employee Provident Fund (EPF) via Voluntary Provident Fund (VPF), which can give them guaranteed returns of 8.65%. Using the VPF opportunity, investors can voluntarily increase their contribution in EPF. They also get tax benefits, and maturity amount is also exempt from tax after continuous services of five or more years," says Vishwajeet Parashar - group head, marketing, Bajaj Capital.

Real returns: Investment return is not just an absolute number. It must be seen in the overall context of things. Explains Manoj Nagpal, CEO, Outlook Asia, "There was a time when PPF used to give 12% return, but government securities used to match those returns. If you look at PPF's return today, it's actually at a premium to government securities, bank FDs and also inflation. We have analysed data and come to the conclusion that PPF is giving a premium over these three parameters."

Comparing PPF returns to tax-saving mutual funds is like comparing apples to gorillas. You need to take debt funds or fixed returns instruments, if you want to compare or recommend PPF as investment avenue. Certified financial planner Pankaaj Maalde points out, "It (PPF) can't be compared with ELSS or ULIP funds which has equity exposure. According to me, PPF is still a good debt investment which not only gives you deduction u/s 80-C but also interest earned is tax free. You can't ignore debt in overall allocation in your portfolio. PPF is more suitable for businessman and professionals compared to the salaried class, who enjoys the benefit of EPF."

Lower but stronger: Interest rates on PPF have been declining over the last couple of years in line with a fall in interest rates across the economy and other debt investment avenues including FDs, government securities, etc. The interest rate on PPF is being aligned to government security yields and would be reset on a quarterly basis. This is broadly in line with a decline in inflation as the economy matures, and the government and Reserve Bank of India’s policies to contain inflation for sustainable growth and conserving purchasing power for the common man. But the government has not slashed PPF returns.

Dhaval Kapadia, director - portfolio strategy, Morningstar says, "Despite a fall in interest rate, PPF continues to look attractive, due to its tax status of EEE, interest earned and withdrawal at maturity vis-à- vis other debt avenues which typically don’t carry that tax status. But as the economy continues to grow and develop and inflation remains at relatively lower levels, interest rates across debt instruments including PPF would move lower. This has been the experience in most large economies like the US, Europe and even China, where interest rates have moved lower from double digit levels prevailing in the 1980’s to low single digit levels."

As interest rates fall further, it might be difficult for investors to meet their investment goals particularly retirement needs just by investing in debt based investment avenues such as PPF. Further, the current cap of Rs 1.5 lakh p.a. on investments in PPF, would create a corpus at the end of 15 years, which might be insufficient to meet one’s retirement needs, avers Kapadia.

Investors saving for long-term goals like retirement, need to consider other investment avenues like equity, which has been known to beat inflation and outperform debt investments over the longer term.

UBER RETURNS

  1. Investors generally look at PPF as an alternative to fixed deposits (FDs)
     
  2. Investment return is not just an absolute number, but must be seen in the overall context
     
  3. PPF rates have been declining in line with a fall in interest rates across the economy
     
  4. Investors saving for long-term goals need to consider other investment avenues
     
  5. Equity can beat inflation and outperform debt investments over the longer term
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