PPF vs ELSS

Since its launch in 1968, PPF (Public Provident Fund) accounts have become a tradition, which gets passed from one generation to another. Our parents managed their savings in PPF and asked us to do the same.

In most cases, when a child is born, a PPF account is opened in his/her name, and every year, Rs 1.5 lakh is duly deposited in the account.

PPF accounts are a favoured instrument to invest for the long term, as well as save taxes. It is the money you can stash away and forget about. A disciplined way to save for the long term.

Back in the '80s and '90s, PPF, with its superior returns and the fact that it allowed you tax savings, was probably the best saving instrument in the Indian market. But looking at current returns and availability of alternate instruments, it is definitely not the best investment.

In fact, you might end up losing about Rs 25-35 lakh over a period of 15 years if you invest in PPF.

Let me explain how:

PPF interest rates have been slowly reducing in line with market interest rates. Unlike earlier, when sometimes it was artificially kept high, now they are linked to market rates - which, in turn, are linked to prevailing inflation. Current PPF interest rates are eight per cent.

So, let’s say you invest Rs 1.5 lakh per annum in your PPF account, which is the maximum allowed at the end of 15 years. You will end up with a corpus of approximately Rs 40.72 lakh in your PPF account.

See the graph below to understand how your money grows:

So, a total investment of Rs 22.5 lakh over 15 years creates a final corpus of Rs 40.72 lakh - a growth of Rs 18.22 lakh.

In contrast, average returns on top Equity Linked Savings Scheme (ELSS) in the last ten years have varied between 12-14 per cent per annum on CAGR(Compunded Annual Growth Rate).

Taking a conservative return of 12 per cent, if you invest Rs 1.5 lakh every year (using a monthly SIP) in these ELSS schemes, your final corpus at the end of 15 years will be approximately Rs 63.1 lakh. This amount is approximately 57 per cent higher than returns from PPF.

*ELSS returns are assumed as 12 per cent per annum.

ELSS provide not just higher returns, but your money is blocked for a lesser period (three years). Whereas, in case of PPF it is 15 years. ELSS provides exactly similar benefits as PPF in terms of tax savings.

So if you are looking to invest for long term and save taxes, it is time to forget your father’s advice and bail out from PPF.

Equity Linked Schemes are better in almost every way. They provide higher returns, better liquidity and multiple options to switch investments.

Stay Smart...Happy investing!!! Maximise Wealth!!!

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ROAD that LED to BLACK MONEY

One 26th May 2014:

Shri. Narender Modi assumed office as the 14th Prime Minister of India. During his election campaign, he has addressed across all the regions that he would make Black money extinct.

On 28th August 2014:
Hon. Prime Minister launched the campaign Pradhan Mantri Jan Dhan Yojana(Prime Minister's People Money Scheme) where he wanted each and every individual of the country must have a bank account.

On August 2015:
RBI launched Sovereign Gold Bonds, it is a paper gold which is stored in Demat Form and moreover get a interest rate of 2.75% annually. It has equivalent value to physical gold. RBI has done this with due consideration of Modiji.

On March, 2016:
Many Indian celebrities/politicians got identified, as major amount was put in foreign banks. Thanks to Panama Papers leak(It was Modi's Trump Card came out). The amount was close to Rs 80000cr. It was major crackdown on Hoarders/Foreigners.

On June 2016:
Govt has mandated to produce PANCARD for the people who are buying gold worth more than Rs 2lakhs.

On September 2016:
Income declaration Scheme launched, where the government has asked the citizens of the country to declare the undisclosed income and pay 45% tax on it, post that no audit, no IT ride on the amount declared.

On 8th November 2016:
Hon. PM Modi has come out with a press conference late night at 9pm and bombarded everyone with the news "Rs 500 and Rs 1000 Notes no more stands valid from midnight and are DEMONETIZED".

Each and every stance there were link, and the people couldn't connect the dots. There was always a plan. Modiji himself warned twice about impending hard decisions. If you still didn't connect the dots then you are at stake. If you are one with Black Money, the govt will ensure that either you Declare or become mainstream or else that you are ruined.

He said open your Bank accounts...you asked why???
He said Declare your Income...you asked why???
He warned you about Black money...you asked why???
He talked about Financial Inclusion...you asked why???
He asked you to buy paper gold....you asked why???
He gave an answer in single shot...

Now ask yourself on why you asked him why???

Now, with Demonetization of the Rs 500 and Rs 1000 notes
Inflation will come down, misuse of cash will come down, no more hawala trade, no more black money during elections, no more supplying of funds to terror groups(Terror Strikes would come down). Real-Estate prices will fall, Gold Prices will fall.

With all the above factors, RICH will become POORER, POOR will become STRONGER.

Fixed Deposits vs Debt Mutual Fund

Bank deposits have been one of the most popular investment options when it comes to earning a regular income. Besides the safety factor, guaranteed income is one of the big pluses why investors opt for bank deposits. 

But what about the income tax factor?  In case of bank deposits, the interest income is simply added to the investors' income and taxed according to their respective tax slabs. 

Apart from falling interest rates, the tax factor is also one of the reasons to suggest systematic withdrawal plans (SWP) in debt mutual funds to be a better option for investors - particularly those in higher tax brackets - looking to earn a regular income from a lump sum. 

Debt funds also offer the advantage of liquidity in case investors want to withdraw. The outlook for debt funds also remains positive.  Debt markets rally when interest rates go down. "Globally debt markets have been in a structural down-move of interest rates due to subdued growth rates and lower inflation.  This is a part of the reason for the lower interest rates in India too in addition to the fundamental of the Indian economy strengthening. Systematic withdrawal plan is  a facility which allows investors to withdraw money from a mutual fund scheme at regular intervals. Investors looking for income at fixed intervals typically opt for this option. SWPs are usually available in two options. In the first option, a fixed amount as specified by the investor is withdrawn at regular intervals such as monthly, quarterly etc. In the other option, investors can withdraw the appreciated amount on monthly/quarterly basis. SWPs are more tax efficient compared to FDs, Debt funds are considered long term only if they are held for more than three years. Currently, the long-term capital gain on debt funds is taxed at the rate of 20 per cent. However, investors get the benefit of indexation on their original investment. This means that the original investment is adjusted for the price of inflation and taxed accordingly.  Since the original cost of investment goes up after factoring in inflation, long term capital gains tax comes to negligible levels. But if debt mutual fund investments are redeemed or sold before three years, the short-term gains are taxed according to the investor's tax slab. SWP in debt funds are tax efficient than fixed deposits even in the first three years of investment. 

SWPs are gaining popularity not only amongst small but high-networth investors as well - those who want a regular income stream. Debt-based SWPs allow safety of capital besides one can opt to receive a monthly inflow.

For example, a person, who falls in the 20 per cent tax bracket, has Rs 20 lakh to invest and wants regular income. For simplicity, let us assume that both the fixed deposits and the debt mutual fund offer 10 per cent return. 

On the Rs 2 lakh interest income generated for the first year from FD, the investor has to pay Rs 41,200 as tax. 

In the case of the debt mutual fund, the investor will receive Rs 2 lakh from the systematic withdrawal plan as per his instructions to the fund house. Let us assume that the NAV of the fund has risen from Rs 10 to Rs 11 in a year. 

So the fund house will redeem 18,182 units from his holdings to pay Rs 2 lakh. The cost of these 18,182 units for the investor was Rs 1,81,820 (18,182 X Rs 10).  So the income tax would be levied only on the capital gains of Rs 18,000 (Rs 2 lakh - Rs 1.82 lakh). So the tax payout for the investor would be Rs 3,700 - as compared to Rs 41,200 in as of bank FD.