PPF is a much maligned product due to investor ignorance

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 24 soon and she already has opened her PPF account. So has my son who is 21 and is still doing his internship !!
  • 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 7.6 % 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.

Interested readers may pls follow my blog on email by clicking on the relevant button on the right hand panel. I will shortly be stopping the practice of posting the links in different Facebook groups. Following the blog will ensure you get intimated whenever there is a new post.

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6 thoughts on “PPF is a much maligned product due to investor ignorance

  1. My portfolio is largely consist of Equity MF, PPF, NRE FD(for Debt), however I still have a PPF acc for me and my wife and I make sure I pay the maximum limit allowed.

    Some times I do question myself, do I really need to invest 3Lakhs(1.5+1.5) in a Debt product rather I can put the same money in Equity MF and the return will be better, but your post changed the view slightly and I am happy that I am doing the right thing.

    Thanks for posting this article. 🙂

    Like

  2. It’s a very enlighting piece of writing. Most of the sites are against PPF and parrot the same without understanding the PPF in deep. PPF should be the base of everyone’s portfolio.

    I use PPF and I pay it to the full every year, Its been 20 years, Its the base of our wealth foundation. I plan to start withdraw at my 65 another 20 years from now.

    PPF can be though as an equivalent of annuity or reverse mortgage instrument without any hassles. Only con is that Banks want to see the physical presence of the account holder to prevent fraud. Probably, the online withdrawal will be there in the retirement years.

    It’s very difficult to imagine what a wonderful amount it becomes if you give it sufficient time due to compounding.

    Like

  3. Dear Sir,

    Thank you for posting this article. I request your view on the pros and cons of investing in PPF vs VPF? I understand flexibility of PPF after the initial 15 year block is over, but VPF doesn’t enforce limit of 1.5L per anum and provides higher interest rates. Another advantage, in my opinion, is government policy making bodies will be more cautious in changing the PF interest rate when compared to PPF.

    For a salaried person with surplus to invest after the allocation to equity MFs and PPF, is VPF a better option than debt MFs?

    Like

  4. DEAR SIR,
    THANKS A LOT FOR THE EXCELLENT POST. CAN I INVEST 1.5 LAKHS PER YEAR IN PPF EVEN AFTER INVESTING 1.5 LAKHS IN PF.ALSO, I HAVE 7 YEARS TO RETIREMENT .HOW CAN I UTILISE THE PPF ACCOUNT FOR PURPOSE OTHER THAN RETIREMENT.

    Like

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