With a strong plan in mind, Public Provident Fund can become an important and strong part of your investment, says Naval Goel.
Illustration: Uttam Ghosh/Rediff.com
The stock market, despite huge returns it always comes out with its cons that might make things quite tough for you.
The wild swings of shares can destroy whole savings and investment.
Fixed deposits are good but they can be turn off because of the taxable interest.
Those investors, who want the best of both should go for Public Provident Fund (PPF).
PPF is basically a long term investment. It is a risk-free investment backed by the government of India.
This scheme is highly great for those who are not covered under employee provident funds and runs their own business and self-employed people. Those who don't have an organised setup can fulfill their goals with the help of a PPF account.
Don't take it as a stodgy investment option when you invest once in a year.
With a strong plan in mind, it can become an important and strong part of your investment.
1. Maximise limit
The 8% compounding interest that you earn can bring huge profits on the table.
PPF account is basically a long term investment where you have an annual limit of Rs 1,50,000 that a person can invest in PPF.
Some people may argue that it is silly to invest Rs 1,50,000 in PPF where you have already exhausted the tax-saving limit under Section 80C.
Don't allow only a tax savings tool to guide your way for a fruitful return.
If you can afford you must invest in PPF as much as you can.
Don't forget that it will be tax-free money.
Talking about the 30% tax bracket, this is equal to receive almost 11.5% interest on a bank fixed deposit.
2. Distribute income
There are several benefits if you open a PPF account in the name of your partner or child as well.
According to the tax laws, if any money gifted to a spouse is invested the income from that part of is an investment is clubbed with the income of the sender.
As PPF is tax-free, it is not going to push tax liability. Through the same, you can invest a decent amount and get various benefits. But the concept will be different is the child is minor.
3. Invest for children
In the case where the child is above 18 years, you can invest Rs 1,50,000 separately on his/her name.
Mostly taxmen will suggest that you club the income of the minor child with parent. But once they complete 18 years, they can go for a separate income.
A PPF is the best way to fund your child’s educational needs and several other goals.
4. Invest before cut-off
When it comes to PPF, it is important to keep an eye on the calendar and makes your contribution to the PPF.
The interest will be compounded annually but the calculation will be on a monthly basis.
The interest will be calculated on the lowest balance between the 5th and till the end of every month. So, you should make an investment 5th, the contribution will earn interest for that month too.
5. Emergencies fund
There is an option of emergency funds as well.
Although it is not a good thing to use your long term savings for some temporary work. But if it is a need, you can withdraw cash from your PPF account.
Withdrawals are allowed only after completing six years. It will be cheaper than opting for a personal loan.
Remember that PPF is one of the best and safest modes of investment.
A PPF account matures in 15 years, but you can extend the same once it matures.
If you don’t have a large amount to invest then you can invest with a smaller amount like Rs 500 per month.
Keep a check and make sure you are not crossing the limit.
Naval Goel is founder, CEO, PolicyX, an online insurance aggregator.
