It is a rather undisputed fact that the Public Provident Fund, or PPF, is one of the most popular savings route in this country. A combination of the assured returns, the safety and the tax break make it a winner. Here is a checklist to keep in mind when deciding what prominence the PPF must have in your portfolio.
1) PPF is no substitute for an emergency fund.
An emergency fund is money set aside for a crisis – be it a bread winner losing his job or a medical predicament, or any such unplanned contingency. (Read: 5 steps to build an emergency fund).
Your savings in a PPF account are completely risk free. Being a sovereign-backed instrument, it is secured by the central government. This is the highest security an investment can have and, therefore, the safest. Another safety layer is that investments in a PPF account cannot be attached under any court order with respect to any debt or liability of the account holder.
Its safety and assured returns are comforting, but that does not make it an emergency fund. The money in an emergency fund must be quickly accessible or it defeats its very purpose. The tenure of a PPF account is 15 years, which is extremely long.
Worth noting though is that you can take a loan on your PPF account. After the third financial year, excluding the year of the deposit, an investor is allowed to take a loan on his investment. If you would prefer a partial withdrawal, that is permissible after the completion of the 6th year from the date that the initial subscription is made.
2) PPF is not a substitute for equity.
The benefits under this account are undeniable.
As mentioned above, it ranks very high on safety. The returns are guaranteed and are reset every fiscal year by the government. From April 1, 2012, the rate was 8.8% per annum but got lowered to 8.7% per annum from April 1, 2013. This year the interest rate was left unchanged.
This is the only exempt-exempt-exempt, or EEE, scheme available in India. This indicates that it is exempt from tax all the way. When you deposit money in the account, you get a tax exemption under Section 80C up to Rs 1.50 lakh. The interest earned is also tax free. On maturity, the lump sum (interest earned + principal invested) is not taxable.
But don’t get blinded. If your savings are limited and channelising all into PPF results in a woefully under-diversified portfolio, then take a step back. No matter how highly you think of PPF, have an equity exposure by way of a diversified equity mutual fund. Equity is all the more crucial in a portfolio if you are young and in a wealth-building stage. With a long-term time frame, in a good fund, you will be able to ride the stock market upheavals and earn a substantial return. Also, long-term capital gains in equity is nil – so you would not pay any tax on your investment return.
3) PPF is not for everyone.
Only resident Indians are permitted to open a PPF account.
If you are a non-resident India, or NRI, you will not be eligible to open an account. The same for a person of Indian origin, or PIO.
However, a resident who becomes an NRI during the account’s tenure can continue prescribing to the PPF account though the money in this account is maintained strictly on a non-repatriation basis. But he cannot extend the account on maturity. Resident Indians can extend the tenure of an account by a block of 5 years on maturity.
If you are thinking of migrating and leaving the country, it is pointless to open such an account. Unless of course it matures when you are still a resident Indian and can claim all the money when it completes its tenure.
4) A PPF is not an option for a periodic cash flow.
A PPF is for investors who want to accumulate their savings over time in a very tax-efficient manner.
The PPF is an ongoing account that has to be maintained for 15 years. You would need to invest at least Rs 500 every year to maintain the account. In fact, you can invest up to 12 instalments in one financial year as long as the totality of investment does not exceed Rs 1.50 lakh.
If you are looking for an investment that will give you some returns periodically, then you should look at the dividend options of debt funds or balanced funds. Even a mutual fund monthly income plan, or MIP, though the monthly dividend is not guaranteed. You could also look at the post office monthly income scheme. Senior citizens can avail of this option from a Senior Citizens Saving Scheme, or SCSS.
5) PPF should not be viewed in exclusion.
When you are determining your portfolio allocation between debt and equity, then PPF should be part of your debt allocation. Take into account the savings going into PPF and your employees provident fund, or EPF. Don’t conduct your allocation after excluding these two instruments.
Also, keep your goals in mind when saving in a PPF. If you are opening a PPF account when you are 45, then it could mature in time for your retirement. If you are opening it when you are around 30, then it would mature in time for your child’s higher education needs. In such instances, the money you save will be very intelligently channelised towards the goals you have laid out.
