PPF – A follow-up post

My post on PPF received quite an good response yesterday, in fact more than 500 visitors on a single day made it the most popular day for my blog. While many have appreciated the article and had nice things to say about it, there were several queries that were raised about it too. I thought it will be a good idea to cover these in a post for the benefit of all readers.

Maximizing PPF contribution is a stretch at the beginning of my career, should I really be attempting it?

• How much you are able to put in PPF is a function of your income, expenses and other investments.
• The long term compounding effect of PPF will grow your initial contributions the most.
• Inculcating a habit of contributing to PPF is a good investment discipline that will be of use to you.
• Maximizing the initial contributions will ensure that your PPF corpus reaches a healthy stage by the time you may need to withdraw from it for your goals.

I can withdraw money from PPF only after 6 years, what about goals that may be sooner than that?

• Well, firstly PPF being a long term instrument withdrawal from it is not the preferred option. This is to be used as an option when it is not appropriate to redeem equity due to market conditions etc.
• For goals that are in the next 2-3 years you need to plan other financial instruments like debt funds etc.
• However, for an ongoing PPF account short term goals can be planned through PPF quite easily. You can just increase your contribution in an account ( maybe that of your spouse) which is not being maximized, earn tax free returns on it and withdraw the goal amount tax free when your goal arrives. Use this for goals like vacation or car purchase.
• Finally, even though you can withdraw only after 6 years there is a possibility of taking a loan from it after 3 years. Again, I would not recommend it as it defeats the long term compounding objective but it is available in extreme cases.

When should I start a PPF account and when should I stop it?

• I thought I had addressed it in my post but let me repeat it here. You need to start a PPF account as early as possible, even if cannot contribute a lot in it.
• I started my PPF account when I was 29 and I consider that very late. My daughter is going to be 21 soon and I have advised her to open an account this year itself.
• You do not need to stop a PPF account ever, just keep extending it for blocks of 5 years. When you need money out of the account simply withdraw the needed amount. You can withdraw a total of 60 % of your maturity balance prior to the extension. So if I have completed 15 years and have 30 lacs in my account, I will be able to withdraw 18 lacs over the next 5 years.
• Unless you feel you need more money that this for your use, simply continue the account.

I already cover my 80C limits through my PF contributions, should I still try to maximize my PPF?

• If you are in a happy situation that your PF contribution is more than 1.5 lacs a year, you can surely afford to maximize your PPF contribution too.
• Remember that PPF and PF have different roles to play in your overall financial portfolio. I believe that PF should be kept strictly for retirement purpose and PPF used more flexibly for goals that come prior to retirement.
• Maximizing your PPF contribution will really let your compounding work in the most effective manner.

Should I contribute to PPF or look at something like NPS as an option?

• Again, NPS is a very different product from PPF and one should invest in it for retirement purposes.
• NPS can be a good option to PF as it allows some exposure to equity for people who earlier did not have that exposure when contributing to PF.
• Invest in PPF for the right reasons, most of these were covered extensively in the original post.

PPF gives only 8.7% interest, why not invest in other products like Mutual Funds?

• Understand that PPF is part of your debt portfolio, so you can only compare it to Debt Mutual funds. You should definitely be investing in Equity MF but that is a different story altogether.
• Compared to Debt MF PPF has the basic benefit of being an EEE instrument as far as taxation goes.
• PPF does not have fluctuating returns and this is a very important consideration for compounding to work effectively.
• It creates a great habit of investing regularly. Even if I wanted to, I do not know how easy it will be to put 1.5 lacs in a Debt MF every year. I find that quite easy to do with PPF.

Why did you close your wife’s PPF account, when you are advising to continue it forever?

• Well, this shows the reader was paying attention while reading which is great.
• Normally, I would not advocate closing a PPF account on maturity but there can be situations where it makes sense.
• In this particular case we needed the money for making the down payment for our Chennai apartment. Availability of this money meant we had to take a loan of 15 lacs, not something closer to 30 lacs.

Can you share the details of your personal experience of using your PPF account?

I have no problems with sharing it but will do so in my next post. In the meantime keep your comments coming.

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