PPF interest rate cut to 7.9% but are other investment options better? Here's a comparison

The 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," says Amol Joshi, Founder, PlanRupee Investment Service. "Investors should continue to take advantage of this long-term tax-free product," he adds. 

Even if you compare 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," says Manoj Nagpal, CEO, Outlook Asia Capital 


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," says Nagpal. 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. 

Should you withdraw from the PPF and invest the money somewhere else to earn better returns? Let us look at the options before investors. 

BANK FIXED DEPOSITS
Interest rate offered : 6.5-7.5% 
Tax treatment : Interest is fully taxable 
Our assessment : Not advisable, because both options will give lower post-tax returns than PPF. 

Like the PPF, bank fixed deposits offer assured returns. But the interest is fully taxable so the post-tax return for someone in the 30% tax bracket is a meagre 4.55-5.25%. So this option is out of the question. The tax-free bonds issued by PSUs  is also not a viable alternative because the yields have come off from their highs and settled at around 6.25%. 

SUKANYA SAMRIDDHI YOJANA 

Interest rate offered : 8.4% (For 2016-17) 
Tax treatment : Tax free corpus 
Our assessment : Works for people with daughters aged below 10. 

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. 















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