Why you must invest in PPF

I have been a supporter of PPF for a long time now and it has been a cornerstone of my financial planning since my early days of investing. It is also a topic over which I have had several debates with many of my friends. The commonly held view is that PPF is an old and stodgy product, rates are controlled by government, it is essentially having poor liquidity and is not something that you need if you are having PF.

Let me explain in this post how I have used PPF and why I think you must have it in your portfolio. I will do this by explaining some of the aspects of PPF and drawing upon my own experience in this.

The first thing to understand about PPF is that it is a long term product and needs to be viewed and used as such. The normal term of a PPF account is 15 years and this can be extended indefinitely in terms of 5 year periods. That being the case, you need to open a PPF account as quickly as possible and keep it going for as long as you can. You must also do the same for your spouse at the earliest opportunity. I had opened a PPF account in February 1994 and it is now in its’ 21st year. My wife has had her PPF account mature a few years back and we have opened another one for here 3 years back.

The second important aspect of PPF is the taxation, which is EEE mode and therefore quite unique among all investment options. This essentially means that you get tax benefits on investment, on the interest earned and also on maturity. LIC policies and PF also give you similar benefits but are nowhere near as flexible as PPF. While one can argue that the government policies can change, PPF is the saving option available to the vast number of workers in the unorganized sector and the chances of this happening are really quite slim.

The third important aspect of PPF is that it is a product that demonstrates the compounding principle like no other product does. You can keep investing in PPF over the years and the compounding logic will work its’ magic quietly. The longer you keep your account going, the more you benefit from it. When I look at my own planning, if I keep my investments going in the PPF account for another 10 years, about 50 % of my retirement expenses can be met from this avenue itself.

The fourth important aspect is PPF instills a sense of disciplined investment of a fixed amount every year. Though the amount you can invest is flexible, once you get into the habit of investing the maximum amount at a particular time you will always do it. Human beings are creatures of habit and once it is formed you will tend to follow it diligently. I invest 1.5 lacs every year by the 5th of April and have known many others who do the same.

The fifth important aspect of PPF is the stability that it provides to your portfolio. While there are other instruments that provide far greater returns on your investment, none of these are giving guaranteed steady returns like PPF does. Over a period of time this builds up to a very substantial figure and serves as a hedge for the fluctuations in the other parts of your portfolio. Investing 1.5 lacs regularly in PPF for 35 years will end up as a corpus of 3.28 crores !!

However, while I like PPF for all of the other things, the real importance of it to me lies in the way I can use it in my overall financial planning. There are really 3 definitive uses that I have of PPF in my financial planning and they are as follows:-

  1. In my current state of financial independence it provides me with a buffer that I can use should other things go wrong. For example, I earn a fair amount of dividend income from my stock portfolio. While this is good, there can be years where the dividend is less due to market conditions. In such a case, I can withdraw some amount from my PPF to meet the shortfall. Note that this is tax free.
  2. I have explained several times that the greatest danger of wealth destruction lies in selling equity at the wrong time. Yet many of us are forced to do it in order to meet a goal. Having a PPF account for a long time ensures that I have enough in it to meet any of my goals save retirement. This means I am free from the vagaries of the stock market. If my goal arrives at a time when the markets have crashed, I simply use money from my PPF.
  3. Once I retire I may or may not keep putting the full amount in PPF depending on funds availability. However, I will continue both of our accounts as it gives me tax free interest at a good rate. In this respect, it is similar to the tax free bonds that some of you may have invested in. I will withdraw money from it as needed and in the end it can be a pretty neat sum for my grandchildren.

Let me now suggest an innovative way of using PPF for short term goals. You may have PPF accounts which you are not funding fully today. Let us say you want to take a vacation abroad in 5 years time. The normal way will be to invest in debt funds or RD / FD etc. However, these involve fairly complex transactions in terms of purchase mechanics and taxation. A far simpler way will be to fund your PPF account with the required amount every year. You earn tax free interest and can simply withdraw the money when the goal is at hand.

My recommendation is that anyone should open a PPF account as early as possible, contribute to it as much as they can, keep it going forever and withdraw from it based on their financial plan. It may not be glamorous or exciting but this is one solid investment that you can depend on and will always stand you in good stead.

I will be happy to answer any specific query that readers may have on investing in PPF.

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24 thoughts on “Why you must invest in PPF

    • 1 withdrawal every year and total of all these withdrawals cannot exceed 60 % of the balance that was there after the original 15 year period. So, if you had 20 lacs as balance then in the years 16 through 20, you can withdraw a total of 12 lacs and the maximum number of withdrawals can be 1 every year. This is when you are continuing your contributions, else it is 50 %.

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      • “This is when you are continuing your contributions, else it is 50 %”-there’s no restriction on the amount that can be withdrawn.If the A/c is not continued for a further period of 5 years(after the initial 15 years) and also not closed,”any amount can be withdrawn but only once in a year”.The remaining balance will continue to earn interest as applicable till the A/c’s closure.

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  1. Sir, can you please educate about the if we can withdraw partial some amount after 15 years or we have to withdraw entire amount. If this possible, why you open new ppf account for your wife when old one expires. In this case, compounding is lost..Please correct me if I am wrong

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    • You can continue the account in blocks of 5 years. In this case you will be able to withdraw partial amount. In my wife’s case we closed the account as we needed the money for the down payment of our apartment in Chennai.

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  2. Sir,

    I don’t think it is sensible for everyone to max out the ppf limit every year especially for those in the early phase of career..if your annual savings is 10 lakhs or more it may make sense to max out ppf. However if its in the range of 5 lakhs it doesn’t make any sense to max out ppf.

    It also depends on what are the short term goals for which a debt mutual fund can only be used as you cannot withdraw from ppf for goals say 5 yrs away.

    In addition, Rebalancing cant be done if all your pf and ppf are your only debt components.

    Overall it may not be a great idea for all to max out ppf limit before 5th of Apr without considering above points.

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    • The whole idea is to invest more in debt from the start so that you have a solid foundation and also a hedge against the vagaries of equity. Thus it is very important to invest max in PPF from the start, you also get 80 C benefit. But yes, if someone’s salary is 5 lacs he will not be able to invest 1.5 lacs in PPF. Re-balancing is not needed if you max out PPF, as your equity component will then grow over time.

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  3. I agree. I have been a big proponent of PPF as well. I’m fact I opened my account even before I completed my graduation, thanks to my father’s advice. Today it is one of the core part of my retirement portfolio(debt) and helping me to plan early retirement. I do not plan to close it and continue extending as long as rules don’t change. Flexibility is the key here, considering you can withdraw partial amount any time, especially if you have it opened for long time

    Regards
    Rakesh

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  4. Hi,

    Is this advisable for people in the 30% tax bracket whose 80c contribution is already at 1.5 lakhs from mandatory employee pf contribution?

    Also, on a separate note I believe you have not covered NPS, as either a good/bad retirement planning option?

    Thanx in advance.

    Regards,
    George

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  5. Sir ,

    An excellent, simple to understand blog as usual . Personally I took your advise and have opened a PPF in SBI few days back , wanted to open for spouse too but she is not an Indian citizen (although a PIO ), and apparently not eligible.Trying to get clarity on that , some online fora suggest that PIO can open PPF if ordinarily resident in India . Pls. let me know if you know something on this.

    I cannot help but think about the lack of knowledge that most of us have when it comes to starting a structured financial portfolio. By the time one gets to understand (I speak from personal example and that of various others I know) , It is already a bit late and a lot of harm is already done.As you had rightly mentioned , the power of compounding also means that a few lost years initially can really bring the overall returns down quite significantly.

    Many years back , I used to work on board sea going merchant vessels , and I remember all new recruits or rejoinees were given a comprehensive guide book which explained all the do’s and dont’s , the privileges and accountabilities and general guidelines on cunduct , safety , hr policies etc .. I think , it is a very good idea if corporates (don’t know if some are doing it already,though!) also give all new joinees handouts /perhaps some training sessions on how to go about the structured financial paths , how to be disciplined in their savings and spending and generally how to maximise their financial returns. And I have just made a rough calculation (quite heart breaking , it is ) if I were to start or if I were made available the knowledge of what I now know when I had joined my first job around 20 years back, In all probability I would be looking at my financial freedom , right about next month or so …

    Your blogs, Sir, are extremely well researched and knowledgeable but what I like most is that how it outlines that anyone can start on the path to financial freedom , anytime.

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    • Thank you Vikas, feedback like this from my readers really makes my day!!

      PPF – though your wife cannot have an account you can look at your children having one.

      Agree on the need for educating new workforce on personal finance issues. I think the most important aspect is you can begin your journey aggressively even though you are a bit delayed.

      With your higher investment potential now, you can make up for lost time to some extent.

      Liked by 1 person

  6. Can i open PPF for my wife ? and is the amount i invested in PPF for my wife , can i declare this amount in my section 80C ? i mean can i tax benefit , if i invest the amount in her name in ppf ? and she is not working women .

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    • Assuming you will live for another 20-25 years and maybe your wife longer than that, it is still a good idea to invest in PPF.

      You can put the maximum amount every year, if your wife is quite younger than you, open the account in her name.

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