Do you really need a PPF account?

By Larissa Fernand |  19-01-21 | 
 

In All your questions on PPF answered, we looked at the basics of the Public Provident Fund. Here we look at how PPF must be viewed in conjunction with your portfolio.

It has the potential to give exponential returns over time, but it requires patience. Also, the larger the amount you invest, the greater the impact of compounding. After all, 7% on Rs 1,50,000 gives you much more than 7% on Rs 500. Now look at this cumulative impact over 15 years.

Let compounding work for you.

Though the PPF has a duration of 15 years, the first year is not taken into consideration when looking at the maturity of the account. The end of the financial year in which the deposit was made is what matters. So, if you opened the account on July 15, 2000, the 15-year tenure will commence from the end of FY2000-01 (March 31, 2001). That means it would have matured on March 31, 2016.

Let’s say you invested Rs 1.50 lakh on July 15, 2000 and since then, Rs 1.50 lakh every single financial year on April 1. Over these 16 years, you would have invested Rs 24 lakh. At a return of 7% per annum, it would amount to over Rs 49 lakh on maturity.

This entire lumpsum is tax free. All the interest earned is tax free. This forced saving (mandatory amount every year ranging from Rs 500 to Rs 1,50,000) makes it an excellent long-term savings tool.

I use it as a tool towards my retirement savings. If you have a little child, maybe you can position it as a savings for the child’s higher education. Whatever be the goal, have a long-term perspective in mind.

Make it work in your favour.

The money in your PPF account is compounded annually and credited to your account at the end of the financial year.

The interest is computed monthly. It is calculated on the lowest amount between the 5th of the month, and the last day of the month.

So to let the principle of compounding work on your behalf, deposit the entire amount – Rs 1.50 lakh before the fifth of April, every single year. Of course, the exact amount you will invest is a personal choice.

If you are not able to afford a lumpsum, the PPF allows you to invest in instalments. Try and put your money before the 5th of the month.

Use it as part of your debt allocation.

Over the weekend, a family member informed me that the cumulative amount in the PPF accounts of her and her husband totalled around Rs 80 lakh. She was really happy about it.

This is a couple who does not understand debt funds but was looking for a safe, long-term fixed return investment. They decided to opt for this PPF. They also decided to extend it on maturity till they really needed the money post retirement.

A colleague who is a fund analyst at Morningstar told me that the PPF has no place in his portfolio because the debt allocation is taken care of by debt mutual funds. He has various other ways of reaching the Section 80C limit of Rs 1,50,000 (interest paid on home loan, tuition fees of children, life insurance premium and contribution to Employee Provident Fund).

On the other hand, though I invest in debt funds, I use the PPF as part of my debt asset allocation and invest in it every single year.

Be objective. It may not be for you.

If you are contributing to EPF and VPF, you could bypass the PPF. A friend of mine, Jairam, is a government employee. He said that by 2025, he should have Rs 1.2 crore in his General Provident Fund and Rs 20 lakh as gratuity. He will also be getting a pension of Rs 80,000 per month. In his case, a PPF would not help but investing in an equity linked savings scheme, or ELSS, would be a better tax investment.

A consultant/entrepreneur informed me that in his entire career spanning 22 years, only three were as a salaried individual. For him, cash flow was not a given, as it would be in the case of an individual earning a monthly salary. He saw no point in locking up money for an extremely long duration which could not be easily accessed.

Another investor pointed out that PPF made sense at one point in his life. But now his contribution to the EPF and VPF and insurance premiums have enabled him to max the Section 80C limit. So once the account matured, he opted out of it.

When I asked some of my colleagues at Morningstar India if they have a PPF account, almost all who I approached admitted to having one, though their levels of enthusiasm and commitment to parking Rs 1.5 lakh per annum were mixed.

I view PPF as a great debt product which is high on safety and super tax benefits. Think about it, putting away money for 15 years with a guaranteed return that is tax-free and risk-free. Who would not want to opt for it? But being a great product does not imply that it is a natural fit in any portfolio. Does it find a strategic place in your portfolio? Does it fit in with your financial plan? If yes, go for it. If not, you can give it a pass.

Investment Involves Risk of Loss.
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Som Mukherjee
Jan 31 2021 03:15 PM
 Mam, With the introduction of deduction less tax policy, do you think that PPF is still a useful tool in our high inflation regime?
Kiran B
Jan 21 2021 06:41 PM
 I have come across an 88 year old person who was advised to open a PPF account to save on tax! He had a pension that was taxable. PPF at the age of 88 was a strange advise! So, you are right - PPF is not for everyone!
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