PPF’s best investment in terms of assured returns

An 8.6% annual return doesn’t quite make the Public Provident Fund (PPF) an attractive investment avenue today. Or does it?
Competing debt instruments such as the National Savings Certificate (NSC), fixed maturity plans (FMPs), corporate and bank fixed deposits (FDs) all offer greater returns. A corporate FD of 1-3 year tenure fetches as much as 11%, while a bank FD gets 9.25% or more. One-year FMPs return nearly 9% and even the NSC fetches around 8.7%.

Only, these returns do not factor in the incidence of tax at maturity.
Post-tax, it is the PPF, that dog in the family, which leads the returns tally (see table). The immensely popular NSC, surprisingly, comes in last. Sure, keeping a PPF account can be trying given the 15-year investment tenure. But that may be a small price to pay for a better post-tax yield at the end of that period, to say nothing of the power of compounding.

“PPF, being tax-free, remains very lucrative. Hence, many of our high networth individual (HNI) clients still like to keep a part of their wealth locked in this instrument,” says Richa Karpe, director - investments, Altamount Capital.

For the record, effective December 1, the interest rate and annual investment ceiling on PPF deposits have been revised to 8.6% from 8.5% earlier. The government has also introduced a 10-year NSC, which will earn interest at 8.7% a year, compounded semi-annually, as against the 8% offered earlier.

Compared with these two instruments, FDs, particularly corporate FDs, shine in terms of pre-tax returns.

“People invest in corporate FDs to take advantage of yields. Our company corporate FDs give returns in the range of 9.75%-10.75% and the tenure is in the 1-3 year range. The post-tax returns are close to 7.5% for higher tax brackets,” says Umesh Revankar, deputy managing director, Shriram Transport Finance Company.

But these investments are also more risky. In case a corporate or bank defaults, there is a guarantee of only `1 lakh, and hence, any investment over that limit could be at risk. Also, it may take up to 4-5 days for an investor to get back his money in case he wishes to terminate the FD prematurely for some reason.

It sure pays to heed the rating on the paper — ‘AAA’ is the highest rating given by credit rating agencies, signifying the firm has an extremely strong capacity to meet its financial commitments. The cost of raising deposits is the lowest for such companies; as the ratings go down, say for a company rated A, the cost of raising deposits increases.

As for FMPs, the capital market regulator has banned the earlier practice of giving indicative returns. Hence, customers have no way of knowing either the returns they will get on their investment or the portfolio in which the company will invest.

In such cases, experts suggest one look up the track record of various fund houses offering FMPs.

“A fund manager’s history and authenticity of the promises delivered by a fund house are a few things that an investor should look for. Anything between 8% and 9% on an FMP can be considered a decent return,” says Amar Pandit of My financial Advisor.