If you fail to make the lump sum deposit before April 5, do so at least before the 5th of the next month (May).
That way you will only lose out on the interest for April.
'Compounding is the magic of investing,' said Jim Rogers, a renowned American money manager. This holds true for investing in the Public Provident Fund (PPF) too.
By depositing Rs 1.5 lakh between April 1 and April 5, you can maximise the return on your investment.
"A lump sum deposit made before April 5 will allow you to earn a higher amount of interest income, which, with compounding, will snowball into a larger corpus than if you invest the money monthly and after the 5th of each month," says Adhil Shetty, CEO, Bankbazaar.com.
Money can be deposited in PPF in any manner: monthly, quarterly, or one-time lump sum.
"If one investor invests a lump sum amount of Rs 1.5 lakh before April 5, over 15 years she would earn around Rs 2.5 lakh more than another investor who invests lump sum or monthly after April 5," says Jay Thacker, member, Association of Registered Investment Advisors (ARIA).
Why invest before the 5th
Even though the total interest is deposited in your PPF account at the end of the financial year, the interest is calculated for each month.
The interest calculation is done on the lowest balance in the account between the 5th and the last day of each month.
"If the deposit is done after the 5th, no interest accrues on the deposited amount for that month. Hence, if you deposit a total of Rs 1.5 lakh by April 5, you earn interest on the total amount for the whole year," says Sahil Arora, chief business officer (unsecured loans), Paisabazaar.
If you forget
If you fail to make the lump sum deposit before April 5, do so at least before the 5th of the next month (May). That way you will only lose out on the interest for April.
Deposits made on or before the 5th in later months (after April) will earn interest from that month onwards and not for the full 12 months.
Tax-free return
By investing in PPF, investors can get a tax deduction of up to Rs 1.5 lakh under Section 80C of the Income-Tax Act.
The final corpus received on maturity is tax-free. Also, since it is a fixed-income instrument it provides stability to the investment portfolio.
Illiquid investment
PPF is an illiquid investment.
"It has a long lock-in period of 15 years. One has to wait for the seventh year to even make a premature withdrawal.
"One can close the PPF account prematurely after five years only to pursue higher education or for the treatment of a life-threatening disease," says Arora.
Investing a lump-sum amount in PPF also comes with an opportunity cost.
"Doing so may limit the opportunities for higher returns in other investment avenues that could offer potentially higher yields over the long term," says Thacker.
Remember also that the interest rate is subject to periodic revisions.
Who should invest?
Individuals with long-term goals, who are also keen to save tax, must surely invest in PPF.
"PPF is a great investment instrument, especially for those not willing to take undue risk," says Raj Khosla, founder and managing director, MyMoneymantra.com.
Some investors, however, should think twice before investing.
"Individuals who need short-term liquidity should be cautious about investing lump-sum amounts in PPF. They should check their cash flow needs and plan prudently before locking their money into PPF," says Thacker.
Also, those seeking higher returns should consider various options and invest according to their risk profile, life situation, and long-term goals.
Things to keep in mind
Start early and invest regularly to make the most of PPF.
"Monitor the interest rates though PPF rates are generally among the best," says Thacker.
While PPF offers stability and tax benefits and is suited for the fixed-income portion of long-term portfolios, consider diversifying your investment portfolio to maximise overall returns.
"The interest rate offered is better than fixed deposits and savings accounts. However, it may not offer as high returns as equity-linked savings schemes (ELSS) in the long run.
"Those with a higher risk appetite may consider ELSS. ELSS also has a shorter lock-in period of three years," says Arora.
Disclaimer: This article is meant for information purposes only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this article to influence the opinion or behaviour of the investors/recipients.
Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.
Feature Presentation: Ashish Narsale/Rediff.com
