Have you ever asked yourself, “What is the PPF?” You must have, as this is a common form of investment for many Indians. For those who wish to save and invest their capital for the long term, yet minimize their risk and ensure returns of a guaranteed nature, PPF is an excellent instrument to look into. It is worth having some of your capital invested in such an account, so you lessen your risk factor if you have invested in riskier instruments like stocks, and balance your financial portfolio.
Several avenues of investment exist, and today, you can get a product that grows your capital and gets you good returns. An individual may, as a first step in investment, open a Demat account, and then start trading in the lucrative stock market. Another, with less of an urge to risk money in stocks, may go in for a more assured way to invest. The Public Provident Fund (PPF), is a popular way to save your money and invest it, so you build wealth through the effect of compound interest. You get tax benefits too, and many people look to PPF as a long-term corpus-building tool, something dependable for the future, like retirement.
After you have learned that a PPF account can help you to save and invest without risk, you should know the answer to the next question, “What is a PPF account and its benefits, and how does it work?”. Before getting into the advantages of having a PPF account, you should be aware of how it works. Any individual can open a PPF account in a bank or at the post office. This is a saving and investment scheme that has the backing of the Government of India. Whether you want to diversify your portfolio by having a mixed basket of investments, like trying to get a subscription to an upcoming IPO, or investing in certain fixed-income instruments, you should know how the instrument works. Here is how a PPF account functions:
In the long list of PPF benefits, there are significant factors to consider depending on what kind of investor you are. However, it is recommended that holding a PPF account saves you tax and is an excellent fixed-income tool to consider, relative to bank fixed deposits.
If you know the answer to the question, “What is the PPF?”, now you must know the answer to the question, “What are the benefits of a PPF account?”. Among the major reasons that people are drawn to this kind of channel for investment is the fact of relatively high-interest rates on your principal. Historically, PPF account interest has always been in the range of 7.6%-8%, depending on the economic conditions of the country. Currently, it stands at 7.1%, which is still high if you compare it to guaranteed income accounts in banks.
While there is a minimum limit to funds you can deposit per financial year in a PPF account (Rs. 1.5 Lakhs), you get PPF benefits like compound interest. Hence, when your interest is earned for one financial year, you get interest on this in the next financial year. The more capital you deposit, the more interest you keep earning. You can make deposits any number of times in a single financial year, as long as you limit your total amount to Rs. 1.5 lakh.
Although your PPF account has a mandatory lock-in duration, you are allowed to start making partial withdrawals from your account from the fifth year into your term. This may be done according to the financial year. However, in one financial year, any account holder can only make a withdrawal of a portion of the collected amount once. Therefore, if you need to make a withdrawal, you have to consider the amount carefully beforehand.
PPF account holders are permitted to take a loan against an amount in their PPF account. These can be taken from the third to the sixth year since the time the PPF account is opened.
Under Section 80 C of the Indian Income tax Act, you get certain benefits from your investment in a PPF account. On any amounts invested, you earn deductions of up to Rs. 1.5 lakh. Furthermore, the interest which is earned from a PPF account as well as the earnings at maturity, are exempt from any taxation. Due to this advantage, your PPF acts as a great instrument for collecting a retirement corpus, especially if everyone in your family has an account.
As an investor, your financial goal should be the substantial spread of your portfolio with many products of investment, both risky and safe. Interest earned in a PPF account is guaranteed, and these are government-based accounts, so security is high. You may open a Demat account to invest in more risk-ridden assets like commodities and stocks, but a PPF account can help boost your finances in the long run. A PPF account is also good as a tool for a corpus as a pension account. Granted, you may think of other more rewarding investments, like subscribing to an upcoming IPO or mutual fund investment, but your portfolio should also mitigate risks. The balance of assets is the key to a robust portfolio.