The rate of 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, Founder, Plan Rupee Investment Service. Investors should continue to take advantage of this long-term tax-free product, it will be helpful to them.
Even comparison of 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.
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. 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.
So here is question arise that 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 | Tax treatment | Our assessment |
| 6.5-7.5% | Interest is fully taxable | Not advisable, because both options will give lower post-tax returns than PPF. |
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 | Tax treatment | Our assessment |
| 8.65% (For 2016-17) | Tax free corpus | 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 | Tax treatment | Our assessment |
| 8.83% (past one year) | Gains taxed at 20% (after indexation benefit) after three years | The post-tax returns will not be able to match the assured returns offered 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 | Tax treatment | Our assessment |
| 7.73% (past three years) | Gains are tax-free after one year | 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 | Tax treatment | Our assessment |
| 11.34% (past one year) | Gains taxed at 20% (after indexation) if held for three years | 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, 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.
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