In India, the 3 most popular ways a person invests their savings is either through a Mutual Fund, PPF or a bank Fixed Deposit. Yet it is nothing short of a million dollar question when you ask any person “where should I invest my money?”
But the answer to this question is no rocket science. An investor first needs to find out his/her financial goals and then assess the extent of risk he/she can take in achieving those goals. Once you are clear with these 2 things, choosing the right one for you will be a walk in the park. The aim of this article is to enable you to make your own investment decision by helping you identify the risks and rewards associated with each of them.
But before that, let’s understand what a Mutual Fund, PPF and FD is!
A mutual fund is an investment vehicle which is offered by Asset Management companies. It is a pool of money which is created by collecting money from a number of individuals. This money is then used to purchase securities such as stocks, bonds, commodities and other asset classes. The AMC hires a financial professional to run the mutual fund with an aim to meet the common investment objective of the participants.
The idea of a mutual fund is to have a highly qualified professional management of your money. Though there are a number of portfolio management services, hiring the best could be very expensive. Mutual fund investment help overcome this fundamental problem by allowing the expenses to be shared between many individuals.
A major added advantage of Mutual funds is Diversification.
Mutual Funds are not of a single type, but are categorized based on the asset classes they invest in. They can be Debt Funds, Equity Funds and Balanced funds. As an investor, this allows your portfolio to have exposure to a broad range of securities. It acts as a hedge against economic downturns.
Public Provident Fund
A Public Provident Fund, commonly referred to as a PPF is a long term savings scheme offered by the government of India. The returns are guaranteed by the government of India and is thus considered to be one of the safest forms of investments. Investments in a PPF are not linked to any securities such as equities or bonds.
Any citizen can invest up to Rs1.5Lakh in a PPF account per year. A caveat to remember is that PPF investments come with a lock-in period of 15 years. Making them very popular amongst people looking for retirement planning.
The returns from this scheme is determined by the government of India. Historically, they have given higher returns than most commercial banks. The current interest rate is 7.1%, though this is updated on a quarterly basis by the government.
Apart from being almost completely risk free, this scheme also offers tax benefits. Both the principle as well as interest returns are completely tax free. Under section 80C of IT act, investments upto 1.5Lakh are tax exempt.
A Fixed Deposit or a FD is one of the most popular investment opportunities . This scheme is generally offered by banks and Non-Bank Financial companies. As the name “Fixed Deposit” suggests, any deposits in this scheme will have a fixed tenure. A person can withdraw before the stipulated tenure but that might endure a penalty.
FDs are known to provide higher returns than a savings bank account and are considered risk free investments. There is no fixed rate of return of a FD as they vary from bank to bank. Senior citizens are usually offered slightly higher interest returns. Over the years, the FD rates in India have been coming down.
Now that you know what these investments schemes are, let’s do a brief comparison of different features you must consider before investing in them.
Since Mutual Funds are categorised based on the securities they invest in, their returns vary.For instance, an equity scheme can have higher returns than a debt fund.The longer you invest in a Mutual Fund, the higher your returns are likely to get.
|Public Provident Fund|
The returns of a Public Provident Fund is determined only by the government of India. The interest result is evaluated every quarter by the government.In 2019, the average rate of return of a PPF was 7.8%. But the government changed the rates to 7.1% in April 2020.
The returns from a Fixed Deposit depends on the bank where you invest. Most popular commercial banks offer FD rates which are between 5-6%.Some companies or NBFCs may offer much higher rates, but they can be risky.
|Open ended mutual funds are highly liquid. They do not have any lock in period and you can enter or exit anytime.Close ended schemes on the other hand have a lock in period which can range from 1 year to 5 years.||PPFs have a lock-in period of 15 years. Hence they are only considered for very long term investments. A person can withdraw a small amount for emergency purposes, but only after the completion of the 5th year.||Fixed Deposits have a lock in period which depends on the tenure you chose at the time of investment.Though you can withdraw your money prematurely, most banks charge a penalty for this.|
|Mutual Funds have varying degrees of risks depending on the type of fund.An Equity Fund will be considered highly risky whereas a Gilt Fund is considered to be a significantly safer investment.||Since a PPF is guaranteed by the government of India, these are one of the safest forms of investment.||A fixed deposit with a bank is considered to be a Risk free investment. But a FD with low rated companies and NBFCs can have significant risks associated with them.|
All 3 investment choices come with their own pros and cons. If you are a highly risk averse investor then a bank fixed deposit would suit your style the most. If you are somebody who wants to generate higher income but with limited risks then you can choose from a range of Mutual Funds. On the other hand, if you are planning for retirement and do not wish to take any risks, then a PPF is suitable for you.
A good way to take advantage of all 3 would be to distribute your capital between all of them. But always give higher weightage to the scheme which suits your financial objectives.