PPF Interest Rate Is Falling. What Are Your Options?

The government has lowered interest rate on PPF by 10 basis points to 7.8 per cent for July- September quarter.

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PPF Interest Rate Is Falling. What Are Your Options?

PPF is one of the most popular savings schemes for the long term.


Interest rates on small savings schemes, including PPF or public provident fund, have gone down in recent years, in line with the general trend of interest rate in overall financial system. Most recently, the government has lowered interest rate on PPF by 10 basis points to 7.8 per cent for July- September quarter. Since April last year, interest rates of all small saving schemes have been recalibrated on a quarterly basis. PPF is one of the most popular savings schemes for the long term and it also qualifies for tax-exemption benefits. 

Despite the lowering of interest rates on PPF, experts still suggest that conservative investors should go for it for long-term savings as compared to bank deposits. However, bank deposits score over PPF in terms of liquidity. "Our view remains that the average inflation for the year continues to be subdued and small savings rates with a 10 bps cut only, provide an extremely good option to conservative investors at the current rates. Especially the PPF still provides an extremely good option at 7.8 per cent as compared to sub-7 per cent interest rates by banks," says Manoj Nagpal, CEO of Outlook Asia.

Besides PPF, Mr Nagpal also suggests NPS or national pension scheme for long-term savings. "Both NPS and PPF should be utilised by investors and the savings allocation should be done vis--a-vis the PPF being the first port for conservative investors and then adding incrementally to NPS for market-linked returns," he said. 

Vidya Bala, head of mutual fund research at FundsIndia, also says that the salaried class could also opt for a higher contribution towards his/her employee provident fund or EPF.  The government had earlier okayed 8.65 per cent interest rate on EPF for 2016-17. 

Ms Bala also feels that "debt mutual funds should definitely form part of every investor's retirement portfolio. Instead of viewing retirement investment merely from a tax-saving angle, investors should start saving for retirement with the intention of building a sizeable corpus. A judicious mix of equity and income accrual debt funds should form part of any long-term retirement portfolio," she says. 

Mr Nagpal of Outlook Asia also suggests accrual debt mutual funds for conservative investors. "For the conservative investors staying with Accrual Funds with high credit quality could be a more optimal investment if they do not want to see volatility but are satisfied with moderate returns," he said. 

Accrual funds mainly focus on earning interest income from the coupon/interest rate offered by bonds. In contrast, duration funds adopt the strategy of generating a big part of their returns from appreciation in bond prices that happen when interest rates decline. Typically, the returns of accrual funds are less volatile as compared to duration bonds.


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