Category: Personal Finance

Withdrawal from PPF account upon maturity

Generally, you can withdraw the whole amount from a PPF account only after the account reaches maturity, which is after 15 years. After 15 years, your entire balance in the PPF account, including accumulated interest, can be withdrawn and the account can be closed respectively. That being said, if you want to withdraw earlier than 15 years, the scheme allows partial withdrawals after completing 6 years of continuous service as PPF holder. You must submit a completely filled Form C to the bank branch or post office where you maintain your PPF account in order to withdraw funds prematurely.

Following that, the PPF will be discontinued, and the funds will be credited to your registered bank account within 7 working days. Partial/premature withdrawals from the PPF account are completely exempted from tax, however, only one partial withdrawal is permitted every financial year. A penalty is imposed at a rate of 1% cut in the relevant interest rate for the duration the account remains open. However, if you want to get the most out of your PPF, you should keep it open until your retirement. This strategy will allow you to create a huge retirement corpus due to the compounding factor of PPF.

Extension of PPF account upon maturity without contributions

When your PPF account reaches maturity, you have the choice of withdrawing the whole balance or extending the account’s term in a 5-year block. PPF extension without contributions implies you keep your PPF account open after it matures, but don’t make any further or subsequent contributions. Until you withdraw the whole amount, your total corpus will continue to generate interest. You can only make one withdrawal from the account at the time of the extension after you’ve extended it for a block of five years. In addition, each year just one withdrawal is permitted. If you do not notify the bank or post office regarding your decision after 15 years, this will be the standard setting for your PPF account.

Extension of PPF account upon maturity with contributions

You can keep your PPF account open and make further contributions to it after it achieves maturity. This is only feasible if you submit Form H at your concerned bank or post office within one year of the account’s initial maturity date to extend your PPF account. If you don’t file Form H, you won’t be able to make subsequent contributions and any such contributions will be considered irregular and will not generate interest or qualify for a Section 80C tax deduction.

You can only withdraw 60% of the account at the time of extension throughout the subsequent 5-year term after the account has been extended with contributions. You are also limited to one withdrawal each year. According to the application of the guardian, an account established on behalf of a minor or a person of unsound mind can be extended. If the account holder does not provide his choice to continue the account within one year of the maturity date, no contributions can be made. Any contribution made in such an account will be considered irregular and the account holder will be refunded without interest by the concerned bank or post office.

Up to the end of the month before the month of closure, the balance in the account on the date of maturity will continue to accrue interest. If the account has been maintained with contributions for one or more five-block durations, you can quit or terminate the account without deposits at the end of any block period, and the account will continue to earn interest until it is closed. After providing your choice for a five-year extension of the account, you will not be able to cancel your request at a later date, according to the Department of Post.

While a Fixed Deposit can guarantee you a fixed sum, the returns are substantially low in comparison to the similar investment in Mutual funds. A comparative analysis will present a clearer picture.

When you invest in a Bank Fixed Deposit (FD), the banks lend this money to businesses in the form of a loan, and when you invest in Equity Mutual Funds, then Mutual Funds Asset Management Company (AMC) further invest the accrued funds in the stock market and buy the equity of companies in turn. Whichever is the way of investment, ultimately, the money is getting invested in the businesses, and your funds have a credit risk associated with it.

On the one side, when people invest in a Bank FD, they feel relaxed and do not worry about the risks associated with the investment; however, on the other side, when they invest in Mutual Funds (MFs), they feel that their money is at risk.

The fact is that be it FDs or MFs, the money is lent to others, and there is always a risk associated with it. If you compare the returns of Large Cap Equity Mutual Funds with Bank FDs, the difference is huge. Therefore, we must understand the risk associated with both the investment instrument in greater details.

Why Fixed Deposits?

First, let us understand how FDs are safer than mutual funds:

1. Portfolio diversification: Banks has diversified portfolios, as they lend not only to the businesses but also to the retail customer. Banks have multiple forms of loans to attract maximum customers, such as Personal Loans, Home loans, Two Wheeler/Four wheeler loan etc. Whereas Equity Mutual Funds Companies generally invest in top 25-100 companies, on the other side banks have millions of customers under their ambit.

2. Insurance on FD: Every FD is insured by DICGC (Deposit Insurance and Credit Guarantee Corporation), which is a wholly-owned subsidiary of the Reserve Bank of India (RBI). However, this insurance covers a maximum amount of Rs 5 Lakh. That means, in case a bank defaults, DICGC is liable to pay you the FD amount (only up to Rs 5 Lakh).

3. Returns are guaranteed: There are no market risks associated with FDs. Hence, the returns are guaranteed by the Banks.

Mutual funds Risk analysis

Credit Risk -If you invest in large-cap mutual funds, these funds invest the accrued amount in the top 20-50 stock market listed companies of India. To understand the real worth of these companies, companies, let us understand the concept with an example of the Nifty 50 index, which represents the leading 50 companies of the Indian stock market.

The market cap (capitalisation) of these top 50 companies is Rs 113.5 Lac Crore, which is almost 60 percent of the Indian Gross Domestic Product (GDP). These companies come from 14 different sectors such as Automobile, pharma, Banks etc., and these are the top companies of their respective sectors. In fact, the Indian economy has a huge dependency on these companies, so it is next to impossible that all these companies will default at the same time, and your investment goes down the drain.

Market Risk- As you might have heard on a daily basis that Mutual funds are subject to market risk. Actually, they are. However, if you stay invested for at least ten years, Nifty 50, a leading benchmark of share market performance, has never given negative returns.

In the last 20 years, it has given an average Compound Annual Growth Rate (CAGR) of 12.3 percent and a minimum CAGR of 5.5 percent (almost current FD rates) on a ten years investment horizon. Therefore, if you are investing for the long term, you can rely on the stock market.

Let’s say, if you invest Rs 1 lakh rupees for ten years, an FD will pay you Rs 1.79 Lakh (assuming 6 percent returns). However, if you invest the same amount in Large Cap Mutual Funds, it will become Rs 3.40 Lakh (assuming 13 percent returns, which is the average of all Large Cap Mutual funds return in 5 years), which is almost 190 percent of FD returns.

Conclusively, you must make an investment decision keeping all the above-mentioned factors in mind because investment in an FD is secure than mutual funds, but the cost of this safety is huge, and returns are abysmally low.

Authored by Ravi Singhal, Vice-Chairman, GCL Securities Limited