By Yogita Khatri, ET Bureau|
Apr 17, 2017, 06.30 AM
IST
The
Public Provident Fund (PPF) will now offer 7.9% but experts say it is still a
good option for investors. Given that consumer inflation is down to 3.65%, the
real rate of return of the PPF is a healthy 4.25%.
“This is quite impressive for an option that
offers assured returns,” says Amol Joshi, Founder, Plan Rupee Investment
Service. “Investors should continue to take advantage of this long-term
tax-free product,” he adds.
Even if you compare the PPF rate with the 10-year government
bond yield, the scheme is attractive. “The 10-year bond yield is a better
benchmark for PPF than consumer inflation,” says Manoj Nagpal, CEO, Outlook
Asia Capital
Currently, the 10-year bond yield is around 6.8%
and the PPF at 7.9% makes it for a premium of 110 basis points. “Historically,
the average premium has been around 75 bps. So, the PPF investor is today
earning a higher real return,” says Nagpal. Even so, some investors may be
feeling disappointed by the cut in the PPF rate. Besides, there are indications
that the rates of small savings schemes could see further cuts in the coming
months.
Should you withdraw from the PPF and invest the
money somewhere else to earn better returns? Let us look at the options before
investors.
SWITCH TO BANK FIXED DEPOSITS
Interest rate offered : 6.5-7.5%
Tax treatment : Interest is fully taxable
Our assessment : Not
advisable, because both options will give lower post-tax returns than PPF.
Like the PPF, bank fixed deposits offer assured
returns. But the interest is fully taxable so the post-tax return for someone
in the 30% tax bracket is a meagre 4.55-5.25%. So this option is out of the
question. The tax-free bonds issued by PSUs is also not a viable alternative
because the yields have come off from their highs and settled at around 6.25%.
GO FOR SUKANYA SAMRIDDHI YOJANA
Interest rate offered : 8.4% (For 2016-17)
Tax treatment : Tax free corpus
Our assessment : Works for people with daughters aged below 10.
If you have a daughter, you can consider opening
a Sukanya Samriddhi Yojana account for her and shift your PPF corpus there to
earn better returns. The Sukanya interest rate will stay ahead of PPF by 50-60
basis points. But shifting to the scheme could take a few years because there
is a `1.5 lakh annual investment limit in the Sukanya scheme. Also, the lock-in
period is linked to the age of the girl and you will not be able to access the
money before she turns 18.
SHIFT TO VOLUNTARY PROVIDENT FUND
Interest rate offered : 8.65%
(For 2016-17)
Tax treatment : Tax free corpus
Our assessment : Worth a
try, but even EPF rate will dip when overall interest rates fall.
This option is open to salaried individuals
covered by the EPF. They can withdraw from the PPF and increase the monthly
contribution to the Voluntary Provident Fund (VPF). In months, they can shift
the entire amount from PPF to VPF where it would earn a higher return. Experts
believe though PPF rates may be cut, the government may not tinker too much with
the EPF rate. A word of caution. The EPF is no longer a 100% debt option. The
EPFO has allowed up to 10% of incremental inflows to be invested in stocks.
Returns could be hit if markets tumble. Experts also warn that EPF rates will
eventually come down.
BUY SHORT-TERM DEBT FUNDS
Interest rate offered : 8.83% (past one year)
Tax treatment : Gains taxed at 20% (after indexation benefit)
after three years
Our assessment : The
post-tax returns will not be able to match the assured returns offered by by
PPF.
Investors looking for higher returns can opt for
debt funds. Though there is no assurance, short-term debt funds can generate
8-8.5% returns. There is no limit to the amount one can invest unlike other
traditional savings option. Though gains are taxable, the investor is eligible
for indexation benefit if the funds are held for three years. Indexation
adjusts the buying price by factoring in inflation during the holding period.
This lowers tax significantly.
INVEST IN ARBITRAGE FUNDS
Interest rate offered : 7.73% (past three years)
Tax treatment : Gains are tax free after one year
Our assessment : Even though returns are tax free after one
year, they will not be able to match the assured returns offered by PPF.
The tax impact can be nullified if you go for
arbitrage funds. These funds invest in equities and derivatives to earn
risk-free returns. Their equity status means the gains are tax free after one
year of holding. However, the returns from these funds have come down in recent
years. Also, the tax treatment could change in the coming years as in case of
debt funds.
GO
FOR MONTHLY INCOME PLANS
Interest rate offered : 11.34% (past one year)
Tax
treatment : Gains
taxed at 20% (after indexation) if held for three years
Our
assessment : Best
option for beating inflation without taking too much risk. But returns are not
assured. Investors willing to take a small risk will find the monthly
income plans (MIPs) of mutual funds rewarding. These funds invest only a small
portion (15-20%) of their corpus in equities while the rest is in debt. The
category has given returns of around 11% in the past three years. “MIPs suit
first-time investors in equities,” says Vidya Bala, Head of Mutual Fund
Research, FundsIndia. The equity portion help deliver a higher return, but it
comes at the cost of volatility. “MIP returns have been volatile with annual
return range being -10% to +20% in the past 15 years,” cautions Nagpal.
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