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PPF vs Equity

PPF vs Equity

Where should you invest?




What is PPF?

Well PPF is well known as Public Provident Fund which can able to be referred as the savings and also the effective tax saving methodology in country like India. The PPF is introduced by the ministry of Finance in 1968, which is fully supported by the central government of India in order to conduct small savings among the employees with guaranteed returns along the benefits of tax relaxations in the name of Income tax.

investment-procedure-followed-in-ppf

Investment Procedure Followed in PPF

Investment Procedure Followed in PPF (Public Provident Fund)

⇒ According the terms and conditions, each and every citizens of Indian are eligible for opening a Public Provident Fund account, and able to invest on their own interest.

⇒ In order enjoy the various benefits offered by PPF organization, investors from India should invest minimum amount of Rs.500 (yearly deposit) for availing valid PPF account.

⇒ Also investors from India are allowed to invest the maximum amount of Rs. 1.5 lakhs in their own self PPF account on every financial year.

⇒ According to the new rule which is amended few years ago, each and every PPF account holder must include guardian details for their PPF account. For new registers, guardian details are mandatory to be mentioned.

What is Equity?

ELSS known as Equity Linked Savings Scheme is a type of investment where investors can invest their money with the lock period of 3 years. Also this type of investment option would enable investors to avail various tax benefits. For individuals who are about to invest up to 1 lakh is eligible to avail tax benefits.

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Protocols to be Considered While Investing in ELSS / Equity

Protocols to be considered while investing in ELSS:

⇒ In order to avail effective financial planning from incomes in the name of ELSS (Equity Linked Savings Scheme) individuals must consider the factors like Investors Age, Income amount, Financial Goal and Risk Appetite involved.

⇒ If the investor well aware of the handling those factors the verdict of ELSS mutual funds would offers more benefits apart from tax relaxations under the Indian penal section 80C.

Advantages and Benefits of Public Provident Funds

advantages-and-benefits-of-ppf

Advantages and benefits of PPF

Lock-In Period for your Money to Grow

⇒ There is a lock-in period of 15 years attached to PPF accounts. That means, you can’t touch your investment for this period, which makes sure that your money grows without any hindrance. Most of the small savings of common man are withdrawn at some point in time in need just because there is no such lock in period.

Unmatched Rate of Interest

⇒ Exclusive and unmatched rate of interest is one of the core reasons why people prefer PPF against all other small saving schemes. The rate of interest for PPF is not fixed and keeps changing every fiscal year. However, one thing that has never changed is that PPF comes with the highest rate of interest as compared to other saving investment schemes. The current rate of interest for PPF is 8.7%. Good intrest rate male the PPF more popular and it is the best Advantages and Benefits of Public Provident Funds.

Loans and Withdrawals against PPF investment

⇒ How about this? You can take loans or make partial withdrawals against your PPF account. This is certainly one of the major benefits of PPF account. In my perception, a PPF account is your Mini-Bank. You keep depositing whatever money you have and when you need it, you take a loan against your investment and repay it later.

Exemption from Debt, Liability and Wealth Tax

⇒ The amount accumulated in your PPF account is exempted from any debt or liability that may be put on your by the court. Even if are convicted on debt by the court, your PPF proceeds would remain untouched. Moreover, you do not have to pay any wealth tax on your PPF proceeds as it is completely exempted from wealth tax as well.

Advantages and Benefits of Equity

advantages-and-benefits-of-equity

Advantages and Benefits of Equity

Dividend

⇒ An investor is entitled to receive a dividend from the company. It is one of the two main sources of return on his investment.

Capital Gain:

⇒ The other source of return on investment apart from dividend is the capital gains. Gains which arise due to rise in market price of the share.

Limited liability:

⇒ Liability of shareholder or investor is limited to the extent of the investment made. If the company goes into losses, the share of loss over and above the capital investment would not be borne by the investor.

Liquidity

⇒ The shares of the company which is listed on stock exchanges have the benefit of any time liquidity. The shares can very easily transfer ownership.

Stock Split

⇒ Stock split means splitting a share into parts. How should an investor be benefited by this? By splitting of share, the per-share price reduces in the market which eventually increases the readability of share. At the end, stock split results in higher volumes with a number of investors leading to high liquidity of the share.

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Which is favorite for Availing tax Relaxation PPF or ELSS?

Which is favorite for Availing tax Relaxation PPF/ELSS?

⇒ Well ELSS as early mentioned it’s fully loaded with risk as the investment would be done mostly in stocks, however, being a mutual fund scheme with the fixed lock in period. Investors would surely improve their wealth by investing in ELSS with the fixed lock-in period.

⇒ On the other hand the PPF is the government-supported firm which has zero percent risk factor in it. However, the interest rates which are offered under the scheme would various on basis of certain fixed time period. But the PPF scheme would ensure on lending the interest to its investors.

Conclusion

⇒ For retired person or any individual who doesn’t want to take any risk when it comes to investment then opting for PPF would be the right option. However, for employees with having more working years can opt to ELSS mode of investment as it provides more benefits in terms of finance.

history-of-ppf-interest-rate-in-last-30-years-ppf-investing

PPF Interest Rate History (Last 30 years)

PPF Interest Rate History (Last 30 years)

This history of PPF interest rate in last 30 years has been as follows:

• PPF Interest Rate 1986 to Jan-2000 – 12.0%
• PPF Interest Rate Jan-2000 to Feb-2001 – 11.0%
• PPF Interest Rate Mar-2001 to Feb-2002 – 9.5%
• PPF Interest Rate Mar-2002 to Feb-2003 – 9.0%
• PPF Interest Rate Mar-2003 to Nov-2011 – 8.0%
• PPF Interest Rate Dec-2011 to Mar-2012 – 8.6%
• PPF Interest Rate 2012-13 – 8.8%
• PPF Interest Rate 2013-14 – 8.7%
• PPF Interest Rate 2014-15 – 8.7%
• PPF Interest Rate 2015-16 – 8.7%
• PPF Interest Rate 2016-17 – 8.1% (till now)

future-of-ppf-investing

Future of PPF Investing?

Future of PPF Investing?

No. I am not questioning the safety of PPF in future. It is run by the Government of India and hence it is (default) risk-free and extremely safe to invest in – no doubt. But what about other kinds of risks?

• What if in future, the PPF is taxed? It almost happened this year for EPF before it was rolled back. But EEE status turning into EET is possible (eventually).

• Another risk can be that withdrawal might have certain riders. Say you cant withdraw full amount on maturity. Or something similar. After all, the government is getting this large amount of money every year at relatively low cost (currently 8.1%). So government will want to reduce this rate and ‘try’ to keep money from going out. That is common sense and that is a future risk for young people like us.

• So when you think that the PPF is risk-free, remember that primarily, it is the default risk that you are talking about. Other risks (known and unknown) still remain.

• Now don’t think that I am against PPF as a product. It is an awesome product! It should definitely be part of one’s portfolio. But…

ppf-as-a-investment-is-good-but-not-enough

PPF as a Investment is good But not enough.

PPF as a Investment is good.
But not enough.

Previous generation’s automatic choice of investment was Provident Fund (PPF/EPF/VPF).

Why?

• The contributions were (and is) eligible for deduction.
• The returns were decent (12% till year 2000 – imagine that ☺ )
• And even the maturity amount is tax free!

What else do you want in this world? But let us for a moment think about one thing:

• PPF account has a maturity period of 15 years. So it is ideally created for goals that are at least 15 years away.

• Now due to the risk-free nature of the product, the returns given by PPF would ideally be less than those given by riskier assets. Isn’t it?

• Also, you and me understand that when investing for long term goals, we can and should invest more in assets that give higher returns in spite of being volatile?

• Why? Because average returns are higher when longer periods are considered. So if we are investing for goals that are due in long term (i.e. 15 years) like say retirement, etc., shouldn’t we be investing in an asset that gives better returns?

• PPF is a wonderful instrument. It gives me peace of mind as returns don’t fluctuate like stocks or equity MFs. But if you and me are able to stomach some of these short-term fluctuations, then we should have a higher exposure to equity as it provides higher long-term returns – which is necessary to build a healthy corpus. And also because in the long run, equity has a better potential of beating inflation and creating wealth.

what-if-we-dont-invest-in-equity-funds-instead-choose-low-risk-ppf

What if we don’t invest in Equity Funds and instead choose low-risk PPF?

What if we don’t invest in Equity Funds
and instead choose low-risk PPF?

The benefits of term plan + PPF combination will be lower (than Term+Equity Funds) but still better than endowment plans. This is because historically, returns given by PPF are lower than those given by equity funds.

So depending on your risk profile and asset allocation requirements, you can club a term plan with either PPF or equity funds or even both!

As for tax benefits, all instruments discussed – endowment, term plan, PPF, equity funds (ELSS) offer tax deductions. So not much to compare here. But do note that the money invested in equity funds is available to you as and when you want (after 3 years in case of ELSS). But bonus accrued in endowment plans are paid only at time of maturity (though you can take loan against it).

What Should You Do?

First, spare a moment for this – History of stock market is full of examples where returns have been poor when everybody was thinking that returns will be great (latest example: 2007-2008). As of now, I don’t know whether everybody thinks like that. But given what indicators tell, most people are quite optimistic (and may be over-optimistic) about future returns.

A solid 15% CAGR is like a no-brainer for most people – which they claim they can easily manage. To be honest, its hilarious to know such opinions. And this reminds me of a beautiful quote that Warren Buffett came up with in his letter to investors in 1997:

warren-buffett-came-up-with-in-his-letter-to-investors-in-1997

Warren Buffett came up with in his letter to investors in 1997

Warren Buffett came up with in his letter to investors in 1997:

"In a bull market, one must avoid the error of the preening duck that quacks boastfully after a torrential rainstorm, thinking that its paddling skills have caused it to rise in the world. A right-thinking duck would instead compare its position after the downpour to that of the other ducks on the pond.