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PPF- Is it worth investing in?

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PPF- Is it worth investing in?

PPF or Public Provident Fund is widely held as one of the safest and best investments that one can make. In recent times, however, with a slew of financial products offering multiple advantages and good returns, is PPF still worth investing in? One thing worth keeping in mind is the fact that since PPF comes with a tenor of 15 years, the compounding impact is substantial, particularly in the last few years. The interest rates on PPF are fixed by the Central Government on a quarterly basis, depending on the yield or returns of Government securities. With regard to saving on taxes, PPF is something that most people rely on.

There are two key reasons behind this, namely that the interest is absolutely tax free and also the fact that annual compounding is highly beneficial. Currently, the PPF interest rates for the quarter between January and March 2019 are 8%. The PPF is annually compounded and this means that the interest that you get in the last year will be earning interest in the present year. There is a sovereign guarantee backing the interest and hence the PPF investment is absolutely safe and secure above everything else. PPF investments can be tied to long-term objectives such as retirement planning.

The interest rates have changed periodically as far as PPF is concerned. In the late 1960s, the rate of interest was once at 4% while in the period between 1986 and 2000, the interest rate was 12%. The present rate of interest has been kept at 8%. The minimum amount that one needs to keep the account active is Rs. 500 and the maximum amount that one can deposit in a particular financial year is Rs. 1.5 lakh. There is a limit on annual investments in PPF and you will have to depend on other investments such as ELSS for building up your retirement kitty.

If one invests Rs. 1.5 lakh in PPF at the average rate of interest of approximately 7.6% then the corpus invested will touch almost Rs. 42.5 lakh. Over the long term, compounding will help you build up a sizable corpus. As a result, investors should aim at investing the maximum amounts in the first few years in order to really get the benefits of compounding in the long run. For example, suppose Rs. 1 lakh is invested every year for 15 years. In this case, the final amount will be close to Rs. 28.5 lakh. The interest component will be nearly Rs. 13.5 lakh in this case. Let’s say Rs. 1 lakh was put in for 10 years and the funds were left to steadily grow till year 15. In this case, the corpus accumulated will be Rs. 22 lakh. Try and avoid withdrawing from the corpus even though PPF allows partial fund withdrawals. Avoiding this will help you get the maximum benefits of compounding.

You may not close out the PPF account once 15 years are completed. You can extend your account in batches of 5 years by making or not making fresh contributions. You can make partial withdrawals once every year in this extended period. PPF is a debt based financial product and generates steady income. PPF is thus suitable or those who do not want any fluctuations or volatility in terms of their returns. PPF also helps in meeting long-term goals such as retirement, buying a home and so on after the 15 year period is completed. The best way out is not to rely fully on PPF since there are other investment avenues which can earn you better returns and you do not have to keep money locked in for such a long period of time to get benefits.

Diversification and balance are the key aspects towards maintaining a healthy financial portfolio. PPF is guaranteed by the Central Government and invests chiefly in fixed income instruments which help ensure a fixed interest rate and overall stability of earning returns. PPF helps in building long-term wealth and savings which can be used to fund long-term goals as mentioned. Investments are tax free up to Rs. 1, 50, 000 annually and returns generated under PPF are also exempted from taxes. PPF is not such a liquid investment since it is mainly tailored for the long haul. At the end of the third year of investment, members can get 25% of the balance as a loan. Withdrawals are possible from the 7th year. PPF is one of the most secure investments that you can ever make.

Premature closure is permitted for the PPF account in case 5 years has been completed by the account, the money is required for treatment of life-threatening ailments and diseases and also in case of higher education needs of account holders. Yet, upon premature closure, 1% lower returns can be availed by customers in this regard. Investing in PPF is all about what your own expectations and goals are. If you are a long term investor, wishing to steadily build up your retirement corpus, PPF is the right product for you. PPF is the best product for those who are hugely averse to risks and wishes to earn returns over the long haul. However, make sure that you do not put all your eggs in one basket since PPF has some disadvantages as well. Firstly, it is not a liquid investment and you have to wait 15 years to really get rewards. Even if premature closure is permitted, you will lose out on interest income and partial withdrawals will only hinder overall compounding. For big investors, the cap of Rs. 1.5 lakh may also be a serious deterrent by all means.

However, if you take cognizance of the fact that inflation rates are at least near 4%, then the adjusted return rate from PPF is only 4%. As a result, this cannot be the only investment that you depend upon. You can of course prepare for long-term needs by investing whatever amount you feel fit in PPF but make sure that you explore other avenues which can give you better returns and short-term liquidity alike.

 

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