As the new financial year FY 25 began yesterday, personal finance enthusiasts should take note that the benefits of schemes like the Public Provident Fund (PPF) and Sukanya Samriddhi Yojana (SSY) can be maximised by starting investment between April 1 and April. This is because the interest calculation of PPF and SSY will be done on the lowest balance in the account at the end of the fifth day of a month and the month's end. By investing Rs. 1.5 lakh within the initial five days of April in PPF or SSY, investors can make the entire 1.5 lakh earn interest for the entire financial year, thus maximising the effect of compounding. It is common knowledge that both these schemes work their magic through the power of compounding.
Take for instance Public Provident Fund (PPF). Of course, the interest rates are revised quarterly, but if we assume that you are investing a maximum amount of Rs.1.5 lakh every year between April 1 and April 5 at the current interest rate of 7.1 per cent for the entire 15 years, then at the maturity, the balance will be Rs. 40,68,208, as per an online calculator on Axis Bank website. However, staggering investments such as monthly investments or investing any time after April 5 will reduce the overall interest earnings. If instead of yearly Rs. 1.5 lakh investment, you opted for a monthly investment of Rs. 12,500 so that your annual investment would be Rs 1.5 lakh (Rs.12,500 * 12= Rs.1,50,000), then the maturity amount would be only Rs.39,44,600.
Public Provident Fund: The current interest rate till the end of the quarter in March 2024 stands at 7.1 per cent per annum. PPF investment has a lock-in period of 15 years. You need not close it and can be extended indefinitely in blocks of 5 years. While the minimum annual amount required each year to keep the account active is Rs 500, the maximum deposit allowed in a financial year is Rs 1.5 lakh. Under the new tax regime, PPF comes under the taxable-exempt-exempt (TEE) category, so individuals cannot claim tax deductions for PPF investments.
Sukanya Samriddhi Yojana (SSY): The Sukanya Samriddhi Yojana (SSY) is a savings scheme for girl children and also follows a similar tax exemption status as PPF. Its interest rate is reviewed quarterly and currently stands at 8.2 per cent. It comes with a lock-in period of 21 years where you can stop investment after 15 years.
Despite the above-mentioned benefits, investors should carefully consider their investment goals before investing. This is because increasing investments in PPF or SSY may reduce your ability to beat inflation, especially if the fixed income allocation dominates your long-term portfolio. Experts suggest that having 50 to 60 per cent equity in your portfolio can offer better chances of beating inflation if your goal is after 10 years. Another reason is interest rates for PPF have dipped considerably much since 2016 when it was 8.7 per cent. If you are someone with a portfolio already tilted towards debt instruments, further investment in PPF or SSY may not be practical.
