SGB vs PPF: Comparison, Returns & Which is Better

Summary

Both sovereign gold bond (SGB) and public provident fund (PPF) are preferred and safe forms of investments. Both come with their share of pros and cons and thus, choosing between them can be a bit challenging. While SGBs offer investors to invest in gold without having to worry about its security or making charges, PPFs provide a steady long-term investment option with guaranteed returns and tax benefits.

If you want to meet your financial objectives within a set timeline, you need to be smart with your investments. The abundance of options in the market might confuse you when it comes to picking between low-risk and high-risk investment options. In this article, we will compare two tax-efficient long-term investment options investment options, namely sovereign gold bond (SGB) and public provident fund (PPF). PPF is a reliable investment option that has been there for years now. They come with stable returns over a longer period. On the other hand, SGBs come with the same benefits of investing in gold and more.

Sovereign gold bonds: Are they worth it?

SGBs, determined in grams of gold, are a safe and secure investment option issued by the Reserve Bank of India (RBI) on behalf of the Government of India. Their minimum purchase is one gram and you can hold them in a dematerialized (demat) form.

Also, they have an interest rate of 2.5% on the initial investment sum which can be tax-free if you hold them till the date of maturity. They can even be used as collaterals for loans and have high liquidity level as they can be traded on the stock exchange. Another reason why investors may prefer SGBs is the guaranteed purity level. 

Now let us look at some benefits of investing in SGBs.

• • Diversification: They can help you diversify your portfolio. 
  • Security: SGBs are backed by the Reserve Bank of India enhancing their credibility. 
  • Good returns: SGBs have an attractive return rate. 
  • Capital appreciation: SGBs appreciate in capital as their value increases with the rise in the price of gold. 

• Tax exemption: The interest earned on SGBs is exempted from income tax. 

Sovereign gold bonds and its downsides

Here are some of the disadvantages of investing in SGBs.

• • Fixed tenure: They have a fixed tenure of 8 years, which means that you cannot redeem them before maturity. Even though the clause can be exited after the 5th year, this can be a major disadvantage for investors. 
  • Lack of liquidity: The fixed lock-in tenure of SGBs mean they can be lacking in terms of immediate liquidity, especially in comparison to other popular investment options. 
  • Market risks: The price of gold can both increase and decrease quite frequently due to economic conditions. This makes SGBs more prone to price fluctuations. As an investor, you might be averse to such risks.  

• High initial investment: When compared to other forms of investment, the initial sum required in SGB is slightly higher. This can be a disadvantage for people with limited financial capabilities. 

Public provident funds: Understanding the basics

PPFs are trustworthy investments, particularly among the older demographic as they are offered directly by the Government of India. Moreover, its tax benefits are listed under the Section 80C of the Income Tax Act 1961.

The investment tenure for PPF is 15 years, which can be a downside for many. You can even extend it for multiples of another 5 years. The interest rates, usually more than FDs, are declared by the government every quarter. Those investing in PPFs can also take loans based on their accounts after 3 years of investment. Note that NRIs, Trusts, and HUFs cannot open a PPF. Now let us discuss the benefits of PPFs. 

• Safety: PPFs are supported by the Government of India ensuring a safe and guaranteed return. 
• Better returns: They have a long investment tenure, which allows compounding of interest and comparatively higher returns. 
• Tax benefits: The associated tax deductions are extremely beneficial for investors seeking to maximize their capital. 
• Easy accessibility: PPFs are quite easily accessible to Indian citizens. You can open a PPF account at any authorized bank or post office around you. 
• Flexible investment amounts: You can invest as low as INR 500 while the upper limit is capped at INR 1.5 lakh per year. This range offers high flexibility for people with different financial status. Moreover, PPF is a great option for someone who has just started investing. 

The drawbacks of PPFs

• Long lock-in period: The lock-in period is very high at 15 years.
• Fluctuating interest rates: Interest rates might change every quarter, which can be considered risky for certain investors. 
• Capped upper limit: You cannot invest more than INR 1.5 lakh per year.

Investing made easy with expert guidance

Ultimately, you and your unique conditions will decide which is a better investment option. Generally, both these schemes are relatively risk-free and considered smart investment options. The choice will depend on your financial conditions, goals, and risk tolerance. However, if you are unsure and don’t want to risk your investments, you should seek expert guidance to understand the schemes better. Professional financial advisors can provide you with more insights to help you choose the right option so that you can maximise the potential of your capital.