Are you planning to invest in FD or PPF account? Have you invested in PPF? Let’s predict something about the future of these two most popular investment schemes.
What is the PPF Account?
Public Provided fund (PPF) account is considered as the most demanding and popular investment scheme of the Indian government.
PPF account is a small saving scheme of the Indian government with 15 years locking period. It also offers income tax rebate under section 80C and tax-free maturity.
Why the Government is offering the PPF Account?
Under the circumstances of fiscal deficit (when expenses of government are higher than income), the government needs funds to touch the breakeven. In this situation, the government raises the facility of PPF investment and security bonds to flow the money from investors’ pockets to the government account.
History of PPF Account
Before 2011, the rate of interest of fixed deposits, securities, bonds were touching a lower scale, whereas the PPF facility was offering guaranteed returns to investors. In that situation, vales of FDs, securities, and bonds were continuously decreasing.
The Congress government took the decision, of altering the rate of interest. They told the investors that the rate of interest on small saving schemes will be aligned with G- Securities rates of similar maturity with a spread of 25 bps. That means the rate of interest of FDs, Bonds, Securities, and PPFs would increase or decrease together. You can follow the below links:
Earlier, the rate of interest of the PPF account was reviewed and revised every year, but, these days, we see review and revision quarterly. This practice impacted PPF negatively.
Here you can see the history of PPF interest rates in past decades.
How the Government Bonds are Directly Linked with PPF?
Referring to the above-given details, PPF account interest rates from Jan 2018 to Sept 2018 was 7.6%. Comparing this figure with the India 10 years bond yield for this duration, one can figure out that the government bonds are directly linked with PPF as far as the rate of interest is concerned. So, the variation in government bonds can affect the PPF figures.
The same fashion is observed in different years as well. On 22 May 2020, the average yield of government bonds was recorded at 5.961%. Dramatically, the FD rates are also around the same figures these days. That means FD rates are also linked with the bond rates.
Future of PPF Account: Comparative Study with USA and Japan
As observed above, returns on the PPF account are directly associated with the performance of government bonds, we need to keep our eyes open. Since India is a developing country, a comparative study of government bond rates with developed countries may bring us some results.
The returns of government bonds in the USA recorded to be 0.096% in the last one month. In the last six months returns were 0.15%. Average of 30 years of returns on government bonds came to 1.36%.
Japan saw a -0.224% yield of bonds in the last one month. In the last six months, it is -0.17%. Calculating the government bonds yield of Japan for the last 40 years, it comes to 0.46%.
Thus, as per this comparative activity, India could also observe the decline in interest rates in the future. The government bonds of India would also see reduced interest rates in fixed deposits and PPFs account.
Future of Fixed Deposits (FD): Comparative Study with USA and Japan
The Indian banking system has observed major declination in FD rates in the past two decades. The Fixed deposit interest rate in Yr. 2000 was 16%, which today is 5.8%.
The rate of interest on fixed deposits in the USA is a maximum of 2% these days. So, if India wants to become a developed country, it has to cut down the FD rates.
Most of the income of the government in developed counties comes from Income Tax. This takes the fiscal deficit to nearly zero. In India, post-GST reform, the income of the government has increased with an increase in taxpayer count. So, if the government is already experiencing huge income from taxes, it does not need to pay more interest to people for their deposits.
As per the RBI circular dated 31 Apr 2020, the interest rates on small saving schemes have been cut down. The interest rate on PPF account brought to 7.1% from 7.9%. Interest in senior citizen saving scheme decreased to 7.5% from 8.6%. Circular: https://dea.gov.in/sites/default/files/RoI%20Q1%202020-21%20%281%29.pdf
Considering the following factors, one should think twice before investing in PPF account:
- The locking period is 15 years
- Rate of interest is also not guaranteed for the whole period
- The decreased yield of government bonds
- The decrement in FD rates
- PPF account holder has to invest till 15 years, irrespective of interest rates
So, are you going to invest in the PPF account or FD???
Akash is a freelance content writer, technically sound in the article and blog writing mechanics adopting the SEO strategy. Along with his professional commitment as a telecom engineer, he has never given up on his hobby of writing articles in the last 14 years. He has worked with top-notch content writing organizations for years and developed writing skills in both Hindi and English languages. He loves to write about Science & Technology, Current Affairs and Finance. Akash also writes poetries and well known in the poetry world as ‘Aks’. He devotes his spare time to singing and traveling.