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PPF vs fractional investment- The pursuit of financial goals

Most Indian investors saving for long-term goals like saving for the higher education of their children or building a retirement corpus are usually risk averse and seek guaranteed returns. As a result, the Public Provident Fund (PPF) has found a place in the financial portfolio of most Indians, with generations of India pushing their progeny to put aside funds in PPF as soon as they receive their very first salary.

Some conscientious investors have even been known to set aside money in a PPF account as soon as a child is born, so as to ensure that the maturity of the PPF coincides with his higher education! Such has been the faith in PPF.

Unsuitable for long-term financial goals

The major reason why PPF has enjoyed popularity is because of the minimum investment amount of Rs 500 and tax benefits Section 80 C of the Income Tax Act of India. The biggest advantage though is that it carries a sovereign guarantee. But under the present circumstances, the PPF may not be the ideal solution to meet long-term financial goals. Here’s why.

From the year 2011, the PPF rates were made variable and linked to the prevailing rate of interest in the economy. This means that the rate of interest on the PPF is set at the beginning of each financial year. While this is advantageous in a rising interest rate scenario, in a falling interest rate scenario (as in the present case) it has the opposite effect. In fact, the interest rate on PPF has been on a steady decline for the past two decades and currently stands at 7.1% from an all-time high of 12% in 2000.

Investors looking to make large investments to meet medium to long-term investment goals, such as the higher education of children in 5-10 years or building a nest egg for retirement in a similar time frame are likely to be stunted by the slow pace of growth in a PPF.

Consider this- The interest rate on PPF has been the lowest at 7.1% in the past two decades. Add to that the rate of inflation at 4.5%. This means the PPF investment will only grow at a rate of 2.6%. So hypothetically speaking, if an investor were to invest 1.5 lakhs annually over 15 years the maturity value will be in the range of Rs 31 lakhs over the time frame (taking inflation into consideration). This amount may not be enough for the earlier-mentioned life goals.

While PPF may still be best suited for a first-time investor looking for a regular investment option, it has some other drawbacks. For instance, a long lock-in period of 15 years, the inability to make even partial withdrawals for the first six years, and an annual cap of Rs 1.5 lakhs on investment make it unsuitable to meet the needs of middle-income investors. What then is the ideal investment option for middle-income investors who wish to meet long-term financial goals with liquidity and safety? The answer lies in an investment option that has not been accessible to retail investors thus far- Commercial real estate through fractional investment.

Why fractional investment?

For superior returns investors, therefore, investors may consider fractional investment in commercial real estate. Fractional investment is recently gaining popularity among the middle class looking for stability and a healthy rate of return. What fractional investment in real estate means is that small investors pool their resources to jointly buy a commercial property.

Leading fractional ownership platforms such as hBits are providing the benefits of ownership of Grade A pre-leased assets to retail investors to whom the commercial real estate has been inaccessible thus far due to complex due diligence, time-consuming asset management, and limited exit options.

With a low-ticket size of Rs 25 lakhs, retail investors can now have access to superior service from leading proptech platforms such as hBits and earn average rental yields in the range of 9-10% from Grade A real estate properties such as offices, warehouses, and data centers. Such property has also proved its resilience in troubled times.

At the peak of the pandemic in 2020, 46% of the total institutional investment in India was in the office market. Over 900 million sq ft of Grade A commercial assets are growing over 40 mn sq ft every year, ensuring a steady supply of premium assets.

Further with the scientific and data-driven process of asset selection and management through a completely transparent process, investors can be assured of total safety. Further, fractional ownership provides the advantage of liquidity, unlike PPF. Thus, an investor may choose to liquidate his fraction to a willing investor at any time through proptech platforms. However, experts recommend a holding period of at least five years to make significant gains on investment.

Number bear witness

Now let’s consider an example. Say, instead of making an annual investment of Rs 1.5 lakhs in PPF each year, an investor makes an initial investment of Rs 25 lakhs in a Grade A property. Property price grows at an assumed 7% each year (assumed to bring in parity with PPF). In six years, the value would therefore be approximately Rs 38 lakhs.

The rental yield for the first three years is assumed at 9% and around 10% from the fourth year (there is an increase in rental yield every 3 years). The total rental income for the period therefore would be Rs 14 lakhs. Therefore, the total return on Rs 25 lakhs investment would be approximately Rs 52 lakhs. This would then suffice to meet life goals such as higher education or saving for retirement in a shorter time frame as compared to a PPF.

As is clear from the example above, while PPF comes with a sovereign stamp, the fractional ownership model in commercial real estate is equally safe and stable. Not only does it offer superior returns, but it also comes with the promise of transparency and liquidity from proptech firms like hBits. Investors can thus consider fractional investment in lieu of PPF to meet their financial goals.

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