Interest rates on Public Provident Fund, or PPF, have been declining over the last couple of years in line with a fall in interest rates across the economy and other debt investment avenues including fixed deposits and government securities.
At one time, the instrument earned 12% per annum. At the turn of the century it dropped to 11% and went further down to 8%. It moved up for a while touching 8.8% before beginning a downward journey to 7.9%. In fact, this rate (set for the April-June 2017 quarter) is the lowest interest rate the instrument has ever given since its launch in 1968.
The interest rate on PPF is aligned to government security yields and is reset on a quarterly basis. This is broadly in line with a decline in inflation as the economy matures, and the government and the central bank’s policies aim at containing inflation to allow sustainable growth in the economy and conserve purchasing power for the common man.
Despite a fall in interest rate, PPF continues to look attractive, due to its tax status of EEE i.e. tax exempt on investment, interest earned and withdrawal at maturity vis-à-vis other debt avenues which typically don’t carry that tax status.
But as the economy continues to grow and develop and inflation remains at relatively lower levels, interest rates across debt instruments including PPF would move lower. This has been the experience in most large economies like the U.S., Europe and even China, where interest rates have moved lower from double digit levels prevailing in the 1980’s to low single digit levels.
As interest rates fall further, it might be difficult for investors to meet their investment goals particularly retirement needs just by investing in debt based investment avenues such as PPF. Further, the current cap of Rs 150,000 per annum on investments in PPF, would create a corpus at the end of 15 years, which might be insufficient to meet one’s retirement needs. Investors saving for long term goals like retirement, need to consider other investment avenues like equity which has been known to beat inflation and outperform debt investments over the longer term. For instance, Rs 1.50 lakh invested in PPF and another Rs 1.50 lakh invested in a 50:50 equity (Sensex) and debt (CCIL Government securities index) portfolio in March 2004 would have grown to Rs 491,000 and Rs 640,388, respectively, by March 2017.
Dhaval Kapadia's views were also expressed in this post on DNA: Even at 40-year-low returns, PPF a good investment avenue
