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A Public Provident Fund account (PPF) is a long-term tax-saving investment scheme that offers a fixed interest rate and tax-exempt returns. It’s a government-backed savings scheme with guaranteed returns.  

PPF account is as famous in Indian households as fixed deposit. Investors, regardless of their risk appetite, can keep aside a certain amount in a PPF account to gradually build wealth.

Some of the common reasons to have a PPF account are:

• Child’s higher education
• Buying a family home
• Weddings or other milestones
• Building retirement corpus

You can earn stable returns on your PPF account and take advantage of tax benefits under Section 80C. As of FY22, the interest rate on PPF is 7.1%. 

Before creating a PPF account, here are some things you need to know. 

What are the investment rules of the PPF account?

Any Indian resident can open a PPF account in a bank or a post office. You can only have one PPF account but you can transfer it from one bank to the other or to the post office if needed. 

You can also open a PPF account for your children and manage it until they are old enough. 

Once you open an account, you must invest between INR. 500 to INR. 1,50,000 in one financial year. Any amount beyond INR. 1,50,000 won’t be considered for tax savings under Sec 80C. 

Your investment will be locked for 15 full financial years and you will continue to earn compound interest on it. However, you can withdraw a partial amount in intervals of 5 years.

Let’s elaborate some more.

Top 4 Features of Public Provident Fund Account

1. Investment Amount

You need to invest anywhere between INR. 500 to INR. 1,50,000 in a financial year on a monthly, quarterly, or annual basis as you get up to 12 installments per year. There’s a small penalty if you miss an installment in a financial year. 

2. Investment Horizon

PPF account has a tenure/lock-in period of 15 full financial years. This means- if you start your account on, let’s say, 1st Oct 2022, your 1st financial year will start from 1st April 2023. 

Yes, you will earn returns on the investment from 1st Oct 2022 to 1st April 2023. But the financial year will begin on 1st April 2023.

You can withdraw a partial amount (50% of the total available balance) only after the completion of 5 years. Until then, the investment will be locked. Though you can claim a loan against your PPF account.

3. Loan Against PPF Account

Since your amount is locked-in, you can apply for a loan against your PPF account.

There are two rules to claiming the loan:

• You can only request a loan from the beginning of the 3rd financial year to the end of the 6th financial year. 
• You will only be eligible for 25% of the amount from your PPF account calculated immediately preceding the year in which you are applying for a loan. 

The interest on this loan will be 1% + the PPF interest rate. If the PPF interest rate is 7.1%, the loan interest rate will be 8.1%.

4. Tax Benefits on Public Provident Fund Account

PPF investments up to INR. 1,50,000 are eligible for tax benefits under section 80C.

However, if you have any other investment under section 80C, then you may not be able to claim the tax benefit on PPF. 

If PPF is your only investment under Section 80C, then you can take advantage of Exempt-Exempt-Exempt (EEE) i.e. The amount invested in PPF, the interest earned, and the final corpus withdrawn at the time of maturity are all exempt from tax.

What Happens If You Choose To Extend the PPF Account After 15 Years?

After the full 15 financial years, you can either withdraw the full amount or extend the account in blocks of 5 years,

In that case, you will be able to withdraw the balance that was available before the extension was locked. So if you had INR. 30,00,000 after 15 years and you extend the account, you can only withdraw 30L. Any further investment will be locked. Also, you can only make one withdrawal in each financial year.  

Can You Terminate The PPF Account Prematurely?

In case you need emergency funds, there are 2 cases in which you can terminate the account.

1. For the medical emergency of a life-threatening disease of you or your parents/spouse/children.

2. For higher education of children.

How to Maximize The returns On Public Provident Fund Account?

There are 2 simple tips that can maximize your PPF account returns. 

1. Invest at the beginning of the year

If you invest a large amount once a year in your PPF account, we recommend doing it at the beginning of the year (Preferably before the 5th of April). 

Most people invest a large amount at the end of the financial year to get tax benefits. However, the interest on the amount is calculated throughout the year. You can take advantage of maximum interest if you invest when the financial year begins.

2. Before the 5th of each month

If you are planning to schedule monthly investments, prefer to do it before the 5th of each month. 

The balance considered for calculating interest on the PPF account is calculated on – the balance in your PPF account on the 5th day of the month and the last day of the month – whichever is lower.

For example, if your balance is INR. 2,00,000 and you invest INR. 50,000 on the 6th of a month, you will earn interest only on INR. 2,00,000 and not on INR. 2,50,000. But if you invest that INR. 50,000 before the 5th of that month, then your interest will be calculated on INR. 2,50,000.

Conclusion

Having a PPF account is a disciplined way of building wealth for the future. You can open an account online and keep transferring money into it. 

It’s a secure investment with stable returns and tax benefits. Continue keeping some money aside for the future and forget about it until maturity. By the time of maturity, you will have a large corpus ready.

Don’t forget to invest money in your PPF account either before the 5th of April each year or before the 5th of each month for monthly installments. That way, you will maximize the returns on your investment. 

 

To know more about long-term investments, give VNN Wealth experts a call or write to us. Get all your queries answered with a thorough portfolio analysis. 

What if you can get FD-like security but higher returns? 

Guess what? You absolutely can.

Corporate Fixed Deposits or Company Fixed Deposits offer all the FD features but with superior returns. You can invest in these FDs for a suitable tenure and earn desired returns by the end of the tenure.

Now, you must be wondering, are Corporate FDs safe? How does taxation work? How to invest in a corporate FD? 

You will find answers to all your questions throughout this article. Let’s dive into it.

 

What Are Corporate Fixed Deposits?

Corporate FDs are offered by Financial Companies or Non-Banking Financial Companies (NBFCs) such as Bajaj Finance, Mahindra & Mahindra, HDFC Ltd., etc. These companies raise funds from investors such as yourself and offer returns in exchange. 

You can create an FD with financial companies or NBFCs for a specific tenure with the promised rate of interest. It’s a safer investment option with promised returns.

If you create a cumulative FD, you will earn interest on the amount as well as the previously earned interest. Cumulative FD can exponentially build wealth over the years. 

 

4 Benefits of Investing In Corporate Fixed Deposits

     1. Superior Returns Than Bank FDs

Corporate FDs often deliver 1-2% higher interest rates than Bank FDs.

Here’s an example of various Bank FDs vs Bajaj Finance Corporate FD for a 5-year tenure.

 

FD rates for 5-year tenure as of Nov’22

     2. Guaranteed Returns

If the corporate/NBFC promised 7% returns by the end of tenure, you are guaranteed to receive it.

However, keep in mind that only RBI-approved and higher-ranked Corporate FDs are safe to invest in. RBI has defined a set of rules that a corporation has to follow in order to raise money via FDs. 

     3. Flexible Tenure

Corporate FDs offer a flexible tenure between 1-5 years. You can choose a tenure suitable for your financial goals. However, the interest rate may vary based on the tenure.

The higher the tenure, the higher the interest you will earn. 

     4. Lower Premature Withdrawal Period 

Both Bank and Corporate FDs have atleast 3 months penalty period for premature withdrawal as per RBI guidelines.

Corporate FDs often have a lower penalty period compared to bank FDs. 

 

4 Things to Consider Before Investing In Corporate Fixed Deposits

     1. Associated Risk

Not all corporate FDs are safe, at least not as safe as bank FDs. The performance of the Corporate/NBFC will affect the safety of the deposit.

With bank FDs, you get security on investments up to 1 Lakhs. Corporate FDs may not offer such security.

Invest only in companies that follow RBI guidelines, have public performance reports, and have higher ratings. This brings us to our next point. 

     2. FD Rating

Platforms like CRISIL often give ratings to various financial instruments. Corporate FDs also have ratings associated with them based on risk and performance.

Deposits with AAA to AA ratings are safer to invest in. Anything below the AA rating may have moderate to high risk. 

     3. Company’s Track Record

Before investing in Corporate FDs, you must check the track record of the company. You can either do your own research or seek help from financial advisors.

Financial experts at VNN Wealth are more than happy to help you select the right Corporate FD to invest in.

     4. Inflation Adaptability

Even though corporate FDs offer superior returns, those returns may not beat inflation. It all depends on the tax slab you fall under.

There is a chance that the returns after tax deduction might not align with inflation. In such a case, you must plan your investment horizon accordingly.

 

Taxation on Corporate Fixed Deposits

The interest earned via Corporate FDs comes under your annual income. You will have to pay tax on the interest earned according to your tax slab. So if you fall under the 20% tax slab, you have to pay 20% tax on the profits earned via corporate fixed deposits.

 

Ready To Invest in Company FD? – Here’s How.

Corporate FDs are best suited for investors who are seeking secure and higher returns. You will get at least a 1-2% higher interest rate with a Company Fixed deposit compared to bank FD.

You have the flexibility to choose a suitable tenure. It will not only diversify your portfolio but will act as a cushion to your overall portfolio during bear markets.

Similar to bank FD, you can create a Corporate FD online. You will have to visit the website of the Company/NBFC to apply for the FD.

After completing the application and submitting the KYC details, you will be able to invest in the FD.

You may also like- FD vs Debt Funds: Where to Invest?

 

What’s the first thing you do when you wake up? You check your phone.

Be it social media, news apps, or finance, every other field is dominated by technology. 

Not only millennials or Gen-Z, almost every generation relies on smartphones for day-to-day activities.

Fintech apps are no surprise in a world where everything is digital. Robo advisory, for instance, allows anyone to automate an investment portfolio. Doesn’t that sound awesome?

 

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But is it really reliable?

The questions everyone should be asking right now are- 

1. Can Robo Advisors handle complex investment portfolios? 

2. Is it safe to trust an AI algorithm that runs on limited data? 

3. And does Robo Advisory guide you when the market falls and panic strikes?

Let’s answer each question, shall we?

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What Is a Robo Advisor?

A Robo-advisor is an algorithm-based automated financial advisor that manages investments and provides investment advice with little to no human intervention.

They usually work by asking a series of preset questions such as goals, risk appetite, income, assets, liabilities, etc. through questionnaires to understand investment behavior and accordingly make investment recommendations. 

This software enables buying and selling of assets and the periodic rebalancing of portfolios.

However, in reality, Indian Robo-advisor apps do not depend on self-learning algorithms but instead are quite simplistic wherein a human consultant codes certain algorithms based on pre-set questions and answers, to understand investor behavior.

 

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Types of Robo Advisors

 1. Simple Robo-Advisors

Simple Robo-advisory asks a set of questions much like a quiz to understand the investment’s risk preference, goals, net worth, liabilities, time horizon, etc. 

These are more like surveys with options to pick from 3-4 different choices of answers and once the investor makes his pick, he’s then recommended certain investment products to invest into. 

Most Indian advisor platforms use this method for providing investment recommendations and according to Indian rules and regulations, one has to initiate transactions on their own.

 

2. Evolved Robo-Advisors

Evolved Robo-advisors focus on artificial intelligence and data learning to provide investment advice. 

These robots basically dig deep into your financial transactions and assess the spending patterns on your credit/debit card as well as banking transactions, rather than focusing on the claims you’ve made by simply picking one of the few available options.

This method helps to fill gaps by having verified information on what you’re spending, any liabilities you may have failed to remember as well as any other patterns related to your decision-making. 

These mathematical algorithms then use this available data to help provide tailor-made solutions for each individual.

They also allow you to permit auto-pilot mode, which enables auto buying and selling of assets on your behalf.

However, the concept of Robo Advisory in its current form i.e. simple Robo advisors is not new to India. These platforms are more Do It Yourself (DIY)/ Digital platforms.

Platforms like ICICI Direct have existed for almost 2 decades now with basic DIY functioning. We personally believe that the current platforms addressing themselves as Robo advisors, is mostly a marketing gimmick, burning private equity money with hardly a new invention at hand.

In fact, even independent human financial advisors use similar digital platforms to manage your portfolio and at the same time let you log in, filter, select, buy/sell and track funds on your own.

The big difference is that there is an experienced human being handling your investments for you using technology versus a call center executive or a sales executive with hardly any experience in wealth management and a pre-written script on the call trying to add the human touch to these Robo advisory platforms.

When there’s an option for both digital and human interactions, why limit your possibilities with Robo advisors?

 

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Why Are Investors Trusting Human Advisors Over Robo- Advisors?

Being able to achieve financial goals via online platforms sounds enticing. Then why are many investors still reluctant about Robo-Advisors?

A study published on ResearchGate compared the perception of Human vs. Robo advisors. In the study, the respondents were randomly assigned to human advisors (both high/moderate experience) and Robo advisors. 

The data was gathered from respondents based on various parameters and it showed the following results:

1. The Trust factor of various advisors was measured on a scale of 1-100. Expert Advisors scored 68.14 whereas Novice advisors and Robo advisors scored 61.24 & 52.25  respectively.

2. Additionally, the Performance Expectancy was measured on a scale of 1-7. Here again, Expert advisors scored 5.39 while Novice advisors and Robo Advisors scored 4.92 & 4.73.

3. Furthermore, the Intention to Hire was measured on a scale of 1-7. Based on the above findings, it’s no surprise that Expert advisors scored the highest, which is 5.33. Novice advisors and Robo advisors scored 4.98 & 4.81 respectively.

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Findings:

From the table below, you can see that there’s not much difference between Novice advisors and Robo advisors on the basis of performance expectation, and intention to hire. Yet, respondents preferred Novice advisors over Robo advisors. 

Expert advisors clearly scored the highest due to their knowledge and ability to build trust by maintaining transparency. 

After analyzing data on various factors such as trust, performance expectation, and intention to hire, it is evident that most respondents chose experienced human advisors over Robo advisors.

 

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(Image Source- researchgate.net)

 

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Another study released by Vanguard found that many investors prefer human advisors to tackle complex portfolios. Especially when the markets are volatile, panic-struck people craved human connection instead of an algorithm.

The Vanguard Study also revealed that – 93% of investors working with human advisors said they wouldn’t switch to Robo advisors. On the other hand, 88% of Robo-advisor users said they would consider switching to human advisors for comprehensive portfolio analysis.

 

 

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(Image Source- Vanguard’s Study on Robo or Human Advisors?)

It’s clear that – Most investors are trusting human advisors more than Robo advisors. 

Robo advisors may be suitable to manage small investments. But when it comes to real market scenarios, most people would rather go with human advisors.

Let’s dig deeper into the topic.

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Why are Robo Advisors not trusted by many investors?

As an investor, you must be aware of realistic market scenarios. The market can change quite often, thereby creating uncertainty.

Even though Artificial Intelligence can do unbelievable things, there are certain things that Robo-Advisors might not be able to do.

 

1. Flexibility and Personalization

Robo-advisors do claim flexibility and personalization, but there are limitations to it. The algorithm molds itself based on the questionnaire you answer.

That means the recommendations are suitable for investors like you- not you in particular. 

Besides, most investors are not fully aware of their personality when they answer these quizzes. They may get confused and select unsuitable options.

In our experience, while answering such quizzes, most people often select options based on what they want to be and not based on who they really are.

For example, the majority of investors think they have an aggressive risk appetite. They assume that they can invest aggressively without getting intimidated by market volatility, but that’s not always true. Many investors panic-sell when their portfolio falls.

 

2. Robo Advisors Do Not Have Feelings

Why would feelings matter, you may ask?

Well, you are human and you have feelings. You are most likely to panic when the market falls and would need someone to talk to. Someone with experience, who handles market volatility. 

Robo-advisors have no idea what to do when investors push the panic button. They have no feelings, hence, they cannot give real-time advice.

You have no one to manage your investments and your feelings on digital platforms. 

On the contrary, human advisors can identify gaps in your portfolio. Also, They can assist you during market volatility, help you understand your risk profile better, and guide you to make suitable investments.

 

3. Limited Human Intervention

Who would you rather call? An experienced human advisor or a sales executive with limited knowledge? 

Some Robo-advisors have the option to talk to sales executives or communicate with a chatbot. Both options, even though convenient, aren’t logical.

A sales rep or a chatbot cannot give you ‘real’ advice. They are following a script given to them. So while they may have answers to your basic questions, they cannot tackle complex portfolios.

There’s very limited human intervention, which can endanger your financial goals.

 

4. Algorithm Bias

Robo-Advisor algorithms only follow implicit values provided to them. It’s a piece of code designed after gathering limited and in some cases, biased data.

There are many reasons why an algorithm might reflect biased responses. Social agendas, financial revenue-sharing schemes (kickbacks), conflicts of interest, and many more.

Basically, the algorithm will only respond in a way it has been trained to respond. 

The bottom line is Robo-advisors can kickstart your investment portfolio. You can create a simple portfolio with a small amount of investment within a few clicks. But when your investment portfolio grows and risk profiles expand (which is inevitable), these digital platforms cannot guide you any further. That’s why most investors even today, seek professional financial advice from humans, most of whom, are anyway equipped with digital platforms to enable ease of transaction.

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Why Should You Choose Human Advisory Services?

1. In-Person Interactions

The major difference between Robo Advisory and Human Advisory is the conversation. Sure, Robo advisors listen to you too, but to a certain extent.

When you seek answers to complex financial queries, only human advisors can help you.

Human advisors can align your portfolio with your long-term financial goals. They can talk to you whenever you want any financial advice.

 

2. Sensible Recommendations and Credible Results

No advisor- neither human nor robot, can guarantee higher outcomes. In fact, they are not supposed to create an illusion of higher returns when it is clearly uncertain.

Nevertheless, human advisors can give you sensible recommendations which can deliver credible results.

For example, we believe that the stock market follows the economy. So, in the long run, as the economy grows, so will your investments, irrespective of everyday market volatility. All you have to do is wait, have patience, and not panic-sell anything. 

These and more such recommendations may not be possible with Robo-advisors who may recommend a sell call in a falling market, when a stop-loss is triggered based on the algorithmic code. Thus, making you book a loss, which may have been avoided if you would have stayed invested.

 

3. Trust and Transparency

How much would you trust a predefined algorithm? At some point, it ought to deliver inconsistent results thereby losing your trust.

You don’t know what’s going on at the backend of Robo advisors. There’s no transparency. 

Human advisors have nothing to hide from you. They can analyze your portfolio in front of you. They can pinpoint gaps and assess risk profiles. At the end of the day, you trust a person who talked to YOU about YOUR portfolio.

If you have any financial queries about your investment portfolio, VNN Experts are just a call away. Give us a call at +91 8408020995 to plan long-term financial goals.

 

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Key Takeaway

If you are a new investor and would like to kickstart your investment portfolio, Robo-advisory might seem like an easy choice. However, relying completely on the algorithm will not help you achieve your financial goals.

There will come a time when Robo-advisors won’t address all of your questions. There’s a gap between what an algorithm can do, what’s really happening in the market, and your evolving risk appetite, which requires frequent portfolio reviews.

That’s why the data in the studies above show that many investors prefer to communicate with Human Advisors. 

Human advisors can offer you suitable recommendations. You can communicate with them effortlessly and seek advice that aligns with your long-term goals. 

You may want to read these 6 tips before choosing the right financial advisor for you.

Now, if you already have signed up for Robo-advisory, do not worry. You still have the opportunity to seek professional advice. 

At VNN Wealth, we offer a thorough analysis of your investment portfolio and risk profile and help you set financial goals. Give us a call or send us an email whenever you are ready to take your investments to the next level.