PPF vs. other investment options

Namita, Pinky’s mother, sat down with Pinky at the dining table, sipping on their evening beverage and guzzling a few snacks. The topic of the day was investment, and Namita wanted to share her wisdom with Pinky.

Namita: Pinky, do you know what a PPF is?

Pinky: PPF? Is it some new smartphone or gadget?

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Namita chuckled: No, Pinky, it’s not a gadget. PPF stands for Public Provident Fund. It’s a long-term investment option that offers some incredible benefits.

Pinky: Really? What are these benefits, Mom?

Namita: Well, let me tell you. PPF is a government-backed savings scheme, and here are the top crucial benefits of investing in it –

Tax benefits

The money you invest is eligible for tax deductions under Section 80C. You can use an online PPF interest calculator to compute the investible you must invest monthly to reach the desired corpus.

Safety

It’s one of the safest investments because it’s backed by the Indian government.

Fixed interest rate

The rate of interest is fixed and usually higher than that of a basic savings bank account.

Savings

It encourages savings for the long term as the minimum investment period is 15 years.

Partial withdrawal

After a certain period, you can partially withdraw from your PPF account.

Compounding power

Your money compounds annually, leading to substantial growth.

Loan facility

You can take a loan against your PPF balance.

No risk of market volatility

Unlike stocks, PPF does not depend on market fluctuations.

Flexibility

You can open a PPF account at various banks and post offices.

Nomination facility

You can nominate a beneficiary for your PPF account.

Joint account

Parents can open a PPF account for their minor children.

Transferable

If you relocate, you can transfer your PPF account to a different branch or bank.

Retirement planning

It is an excellent tool for building a retirement corpus.

Wealth generation

Over time, PPF can generate significant wealth due to compounding.

No attachment

PPF accounts cannot be attached by creditors.

Pinky was impressed but curious “That sounds great, Mom. But what about other investment options?”

Namita: Good question, Pinky. Let’s compare PPF with other investment products:

Savings account

When it comes to comparing PPF with a regular savings account, PPF emerges as the clear winner in terms of interest rates. PPF typically provide a higher rate of interest assisting your funds to grow quickly. In contrast, the interest generated on a regular savings bank account is not just lower but even taxable. By choosing a PPF account, you can make sure your savings work harder.

Fixed deposits (FDs)

PPF provides considerable benefits over FDs in terms of tax advantages. The fund you invest in PPF qualifies for tax deductions as per Section 80 C, which can lower your taxable income. On the other hand, the interest generated on FD is taxable, which can considerably affect your thorough returns. While PPF comes with a longer lock-in equaling 15 years, it often provides a higher return than FDs, making it an enticing product for those looking to invest for the long term.

Mutual funds

PPF provides the security of assured returns, making it a conservative option. On the contrary, mutual funds are subject to market fluctuations, meaning the returns you earn may differ depending on market performance. While PPF offers high stability, mutual funds might generate higher returns over the long run for those comfortable with fluctuations in the market. Your choice between PPF and mutual funds must align with your investment horizon and risk appetite level. The online power of compounding calculator in both cases can be used to understand the overall growth in investments.

Equity-linked savings schemes (ELSS)

PPF offers guaranteed returns with minimal risk, while ELSS investments are market-linked and come with higher risk potential. ELSS investments have a shorter lock-in period of three years, making them suitable for individuals comfortable with market volatility and seeking potentially higher returns.

Real estate

PPF provides the benefit of liquidity and does not need a considerable upfront investment. While real estate potentially offers considerable returns often requires higher initial costs in the form of maintenance expenditures and down payments. PPF allows you to invest gradually over time, while real estate investments may tie up a significant portion of your savings.

National pension scheme (NPS)

NPS is primarily designed for retirement planning and offers tax benefits. PPF, on the other hand, is more flexible and can be used for various financial goals. Your choice should align with your retirement planning strategy and overall financial objectives.

Bonds and debentures

PPF is a government-backed savings scheme, offering safety and tax benefits. Bonds and debentures carry issuer risk, but they may offer slightly higher returns. Your choice should consider your risk appetite and the need for safety in your investment portfolio.

Employee provident fund (EPF)

EPF is mandatory for salaried individuals, with both employees and employers contributing. PPF, on the other hand, is voluntary and offers tax benefits. The choice depends on your employment status and whether you want additional voluntary savings with tax advantages.

National savings certificate (NSC)

While both NSC and PPF are backed by the government, the PPF offers a higher rate of interest.  The lock-in of PPF is 15 years while the lock-in of NSC is shorter just five years. Choosing between them should consider your investment horizon and the desire for higher returns.

Systematic investment plans (SIPs)

PPF provides a fixed interest rate, ensuring stability, while SIPs are market-linked and offer the potential for higher returns. SIPs are suitable for long-term investors comfortable with market fluctuations. The choice depends on your risk tolerance and investment horizon.

Government bonds

PPF is more accessible to the general public, as government bonds often require higher investments. While PPF provides a reliable avenue for savings with tax benefits, government bonds may offer slightly higher returns. The decision should factor in your financial capacity and goals.

Life insurance policies

PPF primarily focuses on savings, with limited life coverage. In contrast, life insurance policies offer both protection and savings components. Your choice between the two should be based on your need for insurance coverage and your savings objectives.

Recurring deposits (RDs)

PPF offers tax benefits under Section 80C, while the interest earned on RDs is taxable. Moreover, RDs permit you to make constant monthly investments, which can be favourable for those seeking a disciplined investment approach. But PPF’s compounding returns can result in better returns over the long term.

Fixed maturity plans (FMPs)

PPF offers greater liquidity, allowing you to partially withdraw funds if needed. FMPs have a fixed maturity period and may offer slightly higher returns but lack the flexibility of PPF. The decision depends on your liquidity requirements and risk tolerance.

Wrap-up

Namita: So, Pinky, PPF is a good financial product with various benefits. However, it is essential to diversify your investments as per your goals and risk appetite level. You can make use of the online power of compounding calculator to estimate your returns.

Pinky: Thank you, Mum, for this enlightening conversation. I will consider PPF as part of my investment strategy.