PPF v/s Gold Bonds: Which offers better diversification?
What's the story
Public Provident Fund (PPF) and gold bonds are two popular investment options in India. Both provide unique benefits, making them ideal for different financial goals. While PPF is a government-backed savings scheme that guarantees returns, gold bonds offer an opportunity to invest in the precious metal without having to physically hold it. Here's a look at the key differences between PPF and gold bonds, to help you decide which suits your investment strategy better.
#1
Understanding PPF's guaranteed returns
PPF is a long-term investment option with a tenure of 15 years. It offers a fixed interest rate, which is currently around 7.1% per annum, compounded annually. The government backs PPF, making it a low-risk option. Investors can deposit a minimum of ₹500 and a maximum of ₹1.5 lakh in a financial year. The interest earned is tax-free, adding to its appeal for conservative investors.
#2
Gold bonds: A hedge against inflation
Gold bonds are issued by the Reserve Bank of India and are backed by the value of gold. They provide an alternative to physical gold, allowing investors to benefit from price appreciation without storage hassles. The bonds have a tenure of eight years with an annual interest rate of 2.5% payable semiannually. While they don't guarantee returns like PPF, they act as a hedge against inflation.
#3
Tax implications on investments
Tax benefits also play a role in choosing between PPF and gold bonds. Contributions to PPF qualify for tax deductions under Section 80C up to ₹1.5 lakh per year. The maturity amount is also tax-free under Section 10(11) of the Income Tax Act. On the other hand, gold bond interest is taxable as per the investor's income tax slab, but capital gains tax can be avoided if held till maturity.
#4
Liquidity considerations in investments
Liquidity is another important factor when choosing between PPF and gold bonds. PPF has limited liquidity as funds cannot be withdrawn before the end of the tenure except under certain conditions after the completion of the minimum lock-in period of six years. Gold bonds, however, can be traded on stock exchanges after the fifth year, giving more flexibility to investors needing early access to funds.