Balanced funds v/s PPF: The difference is clear
What's the story
In India's financial planning landscape, investing plays a crucial role.
Investors look for options that manage risk while providing decent returns.
Two such options stand out: Balanced Funds and the Public Provident Fund (PPF).
While Balanced Funds blend equity and debt for moderate risk-takers, PPF provides a secure, government-backed route with lower risk.
This article explores these options to help investors navigate their choices.
Basics
Understanding balanced funds
Balanced Funds: These hybrid funds invest in a combination of asset classes, typically allocating ~60% to stocks and ~40% to bonds or fixed income instruments.
By balancing growth and stability, they aim to reduce the risk and volatility associated with equity funds while offering the potential for higher returns compared to debt funds.
If you want growth but at a reduced risk, balanced funds are a good choice.
Safety first
The appeal of PPF
The Public Provident Fund (PPF) is India's most beloved long-term investment scheme.
It provides a highly appealing interest rate of approximately 7 to 8%, and this interest is entirely tax-free under Section 80C of the Income Tax Act.
Its 15-year lock-in period fosters a strong savings discipline among investors.
Plus, the backing of the Government of India gives it an unparalleled level of safety.
Analysis
Comparing returns and risks
When it comes to balanced funds vs. PPF on returns and risks, they both cater to different investor preferences.
Balanced funds strive for superior returns by investing in equities, but this comes with increased volatility and risk.
Conversely, PPF provides assured returns with practically no risk. However, these returns are generally lower than what could be potentially achieved through balanced funds over the long term.
Flexibility
Liquidity considerations
Liquidity is a key factor when deciding between balanced funds and PPF.
Balanced funds allow redemption at any time (subject to exit loads), offering flexibility for investors who require early access to funds.
On the other hand, PPF comes with a 15-year lock-in period. Although it permits partial withdrawals from the seventh year under specific conditions, it provides lower liquidity compared to balanced funds.
Planning ahead
Tax implications
Tax implications play a significant role when deciding between balanced funds and PPF.
While PPF interest is currently exempt from tax, this advantage might be eliminated soon.
Capital gains from balanced funds, when held for more than a year, are taxed at 10% without the benefit of indexation.
Grasping these tax treatments is key to effective financial planning, particularly for investors prioritizing post-tax returns.