The Public Provident Fund or PPF is a preferred debt instrument in which millions of Indians have reposed their faith for generations. However, with the rise of the equity cult in the country, many investors are wondering whether it is prudent to continue investment in PPF or choose a few mutual funds and open SIPs (Systematic Investment Plans).
PPF vs Mutual Fund
The PPF currently carries an annual interest rate of 7.1%. Mutual funds can easily fetch higher returns with equity funds, especially in the long term, which can fetch returns in excess of 12-15% or even higher.
However, if one takes a one-dimensional view only through the prism of returns, the answer to the above question might tilt the balance in favour of mutual funds. But there is more than one angle to view this question.
While mutual funds generally carry a higher rate of return, they are volatile and it is not guaranteed. Moreover, except the Equity Linked Savings Scheme (ELSS), mutual funds do not offer tax-saving features. Since they offer tax savings, ELSS funds have a 3-year lock-in period. Incidentally, ELSS funds, too, are covered by Section 80C of the Income Tax Act 1961.
Soveriegn guarantee vs market risk
PPF offers zero risk since the instrument carries a guarantee by the government of India. Just like the Employees’ Provident Fund (EPF), the PPF bears a sovereign guarantee, thereby eliminating risk from the investments.
Tax deductibility
Moreover, exemption from income tax is another prominent feature of the instrument. Though a majority of taxpayers have opted for the simpler new tax regime, PPF has not lost its tax deductibility aspect. It is listed under the instruments in Section 80C of the Income Tax Act 1961.
One can invest a maximum of Rs 1.5 lakh in this instrument every year and get a tax deduction on the amount. PPF is categorised as an EEE (exempt-exempt-exempt) scheme, whereby the principal, interest and maturity amounts are all free from taxes, and there is no ceiling on that.
Utility of debt instrument in portfolio
“A guaranteed-return debt instrument is a necessary element for any portfolio. Therefore, I think the utility of the PPF which is a long-term instrument and carries a significant interest rate is not going to fade away for the serious investor,” remarked Nilanjan Dey, investment strategist and director, Wishlist Capital.
The proliferation of the equity cult has made mutual funds quite a rage among investors in the country. However, it is not the end of the road for the good old PPF. Personal Finance Business News – Personal Finance News, Share Market News, BSE/NSE News, Stock Exchange News Today
