My Debt portfolio – using PPF

With the rate reduction in PPF scheme and the knowledge that it is likely to be aligned to market rates every quarter from now on, is it still a good idea to have it in my portfolio? In my audit of investments for this FY that was the main question I was faced with regarding my PPF investments.

Now in terms of personal finance every issue and decision is contextual and the situation of the individual makes all the difference. In my case I have a PPF account since 1994 and my wife has started a second account in 2013 after the first one was matured in 2004. Some details of these accounts are as follows:-

  • My present maturity is in 2019 April and current balance is about 20 % of our total debt portfolio.
  • My wife’s account will mature in 2028 and currently is about 3.5 % of our debt portfolio.
  • Contribution of 1.5 lacs is made every year in the first week of April to both accounts.

Given the tax treatment of PPF at EEE, I see no reason to stop my investments in it even though the interest rates have reduced to 8.1% currently. I think the returns on PPF will go down further to about 7.5% or so, but even that is not a bad rate for an EEE instrument. In the coming years the interest rate cycle is very likely to turn around and at that point in time, PPF will immediately get benefited as the rates are market linked now.

With the investment decision taken, the next issue is how to use the money in the account. So far I have not withdrawn any money out of my account since 1994 and do not plan to do so till the current maturity in April 2019. The same goes for my wife’s account. Her first PPF maturity amount had helped us greatly to boost the down payment that we were able to make for our apartment in Chennai.

So after a lot of thought these are the conclusions I have come to:-

  • Continue my account after 2019 for another 5 years while being open to withdrawals for any emergency post 2019.
  • Assuming that my daughter gets married in the period beyond 2019, such withdrawals can fund her marriage expenses to the extent needed. Even though I have investments in equity for it, a hedge against market crashes is prudent.
  • Withdrawals can also be used for discretionary purposes such as replacement of white goods, vacations outside India etc.
  • As I will normally not need the PPF account withdrawals for my regular expenditure at least till 2024 or so, in the absence of any of the above the money will simply grow.
  • As far as my wife’s PPF account goes it will grow to 40 lacs plus by 2028. At this point if the returns are decent we will continue it. Note that we can withdraw 24 lacs in the subsequent 5 years from her account.
  • Assuming that I can withdraw about twice that amount from my account in 5 years, the total withdrawn amount in 5 years will be 72 lacs. This can be used for a variety of purposes as explained earlier.

How will I fund the 3 lacs per year? As of now, I am doing it from my Consultancy income and hope to do so for the next 6-8 years. Beyond that or in case the income is insufficient in a year, I have plans to fund it through the redemption of debt funds such as FMP etc that keep happening every year.

In the end what does the PPF investment mean to me? Well, it is something from which I can withdraw any time I have an exceptional expense whether due to an emergency or due to an indulgence that we need to do. It also gives me the cushion of not having to redeem my equity investments for fulfilling a goal, when the markets are in a bad situation.

In short it contributes a great deal to my peace of mind.


PPF investment – it is still the best

The one scary aspect of the budget this time was the rumors that PPF withdrawals may be taxed. Fortunately these rumors turned out to be untrue, but I have had several questions from people asking if I have changed my opinion on PPF being the best investment in the debt space. After giving due consideration to all aspects, my opinion is that PPF remains the best instrument in the debt space, only bettered by SSY for people who have a girl child below the age of 10. As i have written several posts on PPF earlier, I am not going to explain the features and benefits of PPF here – do read those posts if you are interested.

Let me start by the fundamental issue first. Even though PPF has been spared this time, is it likely that it may be taxed in the future? I think the answer to this question is YES. Even though it is going to be a politically difficult decision to tax PPF withdrawals, it is likely that at some point in time the government will have to do it. This has been a suggestion made long back by the Kelkar committee and I think the EET treatment will be finalized in some years to come, maybe sooner than later.

Why then do I say that it is still the best instrument? Well, my reasons are as follows:-

  • Whenever the PPF withdrawal becomes a tax liability, it will always be with prospective effect. For example, if it were to become taxable from the next FY then your accumulated amount in PPF account could still be withdrawn without any tax impact. So, there is absolutely no need to close your PPF accounts thinking that you may need to pay taxes on your current corpus.
  • As was explained in the case of PF, even when PPF withdrawal is taxable, you will  be having tax liability on 60 % of the interest. The principal amount as well as 40% of the interest continues to be tax exempt.
  • The flexibility associated with PPF means you can stop your contribution at any time and also withdraw in a phased manner. When you are not having active income your PPF withdrawal can be phased, so as to ensure you minimize your tax impact.

Based on the above, I do not see any need to change the PPF strategy that I had advocated earlier. In fact, this is how I plan to use PPF for my own purpose:-

  • Continue investing 1.5 lacs every year for both myself and my wife. This will either come from some active income through consultancy or from FMP redemption.
  • I do not see a need for any withdrawals now, but may start to do so after another 5 years, for my discretionary expenditure.
  • In my case, I will stop the contribution or reduce it when the interest on fresh contribution becomes taxable to the extent of 60%. However, this is purely due to my stage in life. Anyone below 45 or so, should logically keep contributing.

That in essence is what most of the readers should do also. There is no real need to be in a tizzy due to the confusion in the budget. PPF remains the best investment of it’s kind, continue to invest in it with confidence.

PPF – can you start at any age?

As many of you know by now, PPF is one of the favorite financial instruments that I encourage others to go for. There is also a lot of curiosity about the product, as is evidenced by the views, comments and questions on the posts that I have written about PPF. Many people have asked me if there is a correct age to invest in PPF or is there an age after which we should not look at PPF as an investment. Let me try to address these issues in this post.

In order to gain the maximum possible advantage out of compounding, one should be invested in PPF for as long as possible. Therefore, any investor who is just starting his/her work life should open an account and try to maximize the contribution every year. The term of the PPF account need not be seen as 15 years, you can continue it in blocks of 5 years for as long as you want. You can withdraw from it only if you need the money for a goal that has come up and for which you do not want to redeem your equity portfolio. The best situation for your PPF will be if it is able to grow uninterrupted, you can create serious wealth if you can do so. Remember PPF is important even if you have PF as you can withdraw from your PPF in a far easier manner than you can from your PF. In case you are not having a PF account then consider opening a PPF account for your spouse too.

What happens if you are in the age group of 30 – 40 and have not got a PPF account so far? Well, you should still go ahead and open one. Your children will probably need money for college when you are between 47 – 53 and the PPF account completing around that time will serve as a nice hedge. I know many of you are saying – “but I am doing SIP for some years now and that will take care of it”. Maybe it will, but it is quite possible to have a string of poor years in the markets just when you need the money. Having a PPF account with all the cash sitting there is a perfect antidote. And, if it so happens, in case you do not need to withdraw again just let it grow.

What about people older than 40? Well, I think they should also have a PPF account. You can time it such that the 15 or 20 years are up when you are just retiring. In the first decade of your retirement use the PPF and PF money to take care of your expenses. This will help your MF and stocks portfolio to grow and hopefully there will be enough for long term care too, should you need it.

If you are beyond 50, you can still have use of PPF account for tax saving purposes and to use the tax free withdrawal feature. This can be a very useful way of ensuring that you do not pay much taxes on the income that you will need for taking care of your regular annual expenses. Finally for even older people you can operate a PPF account for your grand children. They will get a pretty handy sum to start off in life when the pass out of college.

So there you are – the stodgy debt product that does not seem worth investing in can be used in so many different ways. If you still do not have a PPF account, I hope this post has now encouraged you enough to make opening it as one of your 2016 resolutions.

Retirement spending -use PPF intelligently

In the cyber world feedback is instantaneous. Within hours of writing my post on how the retirement corpus could be much lower than what people normally think, two of my friends called me. One was excited that his current investments were much ahead of the number I had stated, while his expenses were in line with my post. The other expressed doubts whether 40 lacs in PPF would go a long way for retirement usage.

Well the proof of the pudding is in the eating, so I decided to do a basic spreadsheet on it. This is something I normally do not do – after all, if you are clear about something fundamentally then where is the need to prove the obvious? However, the assumptions and results are as follows:-

  • With a starting amount of 40 lacs, deposit of 1.5 lacs for 10 years and withdrawal of 4 lacs every year for 10 years you will still have 50 lacs at the end of 10th year.
  • In the second decade you can withdraw 6 lacs every year without any deposits and still be left with 21 lacs at the end of 20th year.
  • Note that all withdrawals are tax free and you will get 80 C benefits on the deposits for the first 10 years.
  • Interest rate assumed is 8 %, which is probably what it will average out as over the years. Conservative investors can use 7 %.

The bottom line is this – using PPF in an intelligent manner will stretch your money as well as make it tax free which is an ideal combination. The other key idea is to let your equity grow till the third decade of your retirement. You may well need great amounts of money for long term care, should you survive beyond 80 years and equity is the best bet.

So, no matter whether you are just starting out, are in your thirties and do not have a PPF account or have one which is kind of dormant, you must fully fund your PPF account. It will be a hedge in times when you do not want to redeem equity for your goals and it will also serve as a great tool for retirement planning when the time comes.

Many people confuse PPF with equity investments which is comparing apples and oranges. You do need equity in your portfolio but PPF is clearly the best debt instrument available which must be your first choice. Look at debt MF etc only after you exhaust your PPF contribution – preferably for both you and your spouse.

You will be glad in your retirement years that you took this seemingly dull but eminently sensible approach.


PPF – what should be the strategy now?

Readers who have been with the blog since it’s inception will know that PPF is one of my favorite debt instruments. New readers may want to read the post on Why you must invest in PPF. As this post attracted a lot of feedback and comments, I had to do A follow-up post on PPF. Finally as readers wanted to know how I had used PPF for my own financial planning, I did the final post on PPF – A personal perspective. Now several people have asked me what is likely to happen to the PPF rates in the current interest rate regime and whether investing in it is still a good idea or not.

Before we get to the strategies of how to deal with PPF, let us first look at the historical rates of PPF over the last 30 years. It will be interesting to see that, in general, PPF rates have tended to be sticky and except for a brief period when the NDA government tried to link it to prevailing interest rates in the market, changes have been fairly rare. Look at the data:-

  • Between 1986 and 2000 the rate was fixed at 12 %
  • Between 2000 and 2003 it went down every year and dropped from 11 % to 8 %
  • Between 2003 and 2011 the rate remained at 8 %
  • Since 2011 the rates have not changed much and the current rate is 8.7 %

It is important to note that with the RBI reducing rates sharply of late and recommending that the small savings rate be bought in line with the bank FD rates, a change in the PPF rates is imminent. Politically the NDA formation believes in aligning rates of such instruments to the market rates, as they demonstrated the previous time. I fully expect the rates to come down to 8 % shortly and maybe even 7.5 % in the next budget.

So what should a new investor do now? I believe that despite the rate cuts that will definitely happen, PPF remains the best debt instrument that you can invest in due to the EEE tax treatment that it gives you. Remember that you are getting only about 7.5 % from Bank FD and and after taxes it will only be a little more than 5 %, if you are in the highest tax bracket. You can invest in debt funds where the returns will improve with falling rates, but remember that with lowered inflation the cost inflation index will also increase less and the effective taxation of LTCG in debt funds may increase. Also, PPF is a long term instrument that builds investment discipline. But most importantly, over a period of time it builds you a suitable corpus that you can tap into at the time of your goals. should the time not be a right one for redemption of equities due to the markets doing badly. This is really the biggest risk in equity investment and PPF gives you a cover for it. My suggestion to all new investors will therefore still be to open a PPF account as early as they can and maximize their contribution there.

As far as existing investors are concerned, the choice is really simple. You should simply continue investing in it without worrying too much about the rates. You are doing this as part of a financial plan and need to stick with it. In the long term these changes in interest rates will keep happening and, despite the inevitable lower returns, PPF remains the most attractive instrument for the reasons mentioned earlier in the post.

In summary, do not get flustered by the coming rate changes of PPF to 8 % or even 7.5 %. Continue with it if you are an existing investor and open a PPF account now if you do not have one yet. You will never regret it, I have not in 21 years.

PPF – A personal perspective

There have been some requests for sharing my own PPF experience and I wanted to do so in this post. As I have said earlier, I started my PPF account when I was 29, and wish I had done so earlier. Like many things in my life, I will have to credit my wife for encouraging me to start a PPF account. She already had one when we got married.

One of the first things I did was to maximize the contribution for both me and my wife. At that time it was 60000 Rs which has now increased to 1.5 lacs per year. We also got into the habit of making the contribution in early April of each year. This helped us in our financial discipline and also enabled us to earn the maximum possible interest in the year. At the start it was easy to do this as we were not having many other investment options. As the family grew expenses increased and other investment options created their own space. However, we continued our regular investment in PPF over the years. So much so that when we relocated to Chennai in 1998, we would make our vacation plans for travel to Delhi in April and one of the objectives was to deposit the PPF contribution.

Nowadays, of course, you can deposit the PPF amount online and even have online access to it. This has enabled us to maintain the original PPF account in Noida without going through the process of getting it shifted to Chennai or Hyderabad.

The advantage of having a long term PPF account was demonstrated to us quite powerfully in 2004. My wife’s account matured that year and we got an amount of 11 lacs odd. This helped us significantly to bump up the down payment of our apartment in Chennai. We had to take a loan of 15 lacs but this would have been much more without the PPF amount. This is a real life example of how PPF money can be used, partly or fully to achieve our goals.

My own PPF account completed 15 years in 2009 and I have now extended it twice. Over the years I have always contributed the maximum amount in April of each year. I hope most of you are aware that to get the full interest of the year, you need to do your contribution by the 5th of April. A rough calculation tells me that I will have an amount slightly in excess of 1 crore if I continue to invest for the next 10 years. The reason I want to continue investing in it is this – I see PPF as my main instrument of debt allocation which grows in a compounded manner. I do have more money in FMP but that is more like a passive income stream that I have set up for my financial independence.

What is my plan with the PPF account? Well, I have not thought through it completely but my approach is going to be as below:-

  • From now till I retire in about 9 years ( contrary to what many feel I am not retired !!), my shortfall in passive income due to market falls can be met through withdrawal from PPF.
  • The same goes for any goals, such as my daughter’s education ( PG ) , that may need use of this money.
  • After 10 years too I plan to keep the account active and earn interest out of it. Usage of the money will again be for meeting passive income needs or for any particular goals.

Now, had I started PPF 5 years earlier than I did, the amount available would be almost 1.5 times of what I have today!! That is really the power of compounding and regular investment. It is also the reason I advise everyone to open an account as soon as possible.

We have also started an account for my wife 3 years back when she began having some part time income. The plan remains the same, continue to invest the maximum amount and use it only when needed.

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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.

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.