Even after Rate Cuts, PPF is good for your Long Term Goals

PPF rates have been cut from 8.0% to 7.9% (in April 2017).

And as far as historical PPF rates are concerned, this is the first time that rates have dipped below 8% – sadly, the psychological risk-free rate barrier for many.

PPF Rate History upto 2017

Many people are now questioning the suitability of PPF as an investment product. Doubts over PPF are further fueled by good returns given by equity in recent past. Many equity funds have given 20-30% returns in last one year. So people are bound to ask questions.

But really… is it time to write off the PPF?

No. Ofcourse not!

Those who think that – are the ones who don’t understand a lot of things.

PPF remains a great choice in debt space for most people.

Even if you were to plainly see the 0.1% cut in PPF rates, it only translates into a difference of just Rs 150 on a full Rs 1.5 lac annual limit. 🙂 So its not that world of PPF is crashing with this 0.1% cut.

PPF – Still a Good Option

A tax-free return of 7.9% is quite reasonable in falling interest rate scenario where inflation too is within control.

Also, it makes sense to compare PPF returns with returns offered by comparable debt investments today. Only comparing it with its own past high returns won’t help you make investment decisions today.

The safety it offers and the EEE taxation status (where investments, interest income and maturity amounts are tax-free), it’s no doubt a beautiful product.

But like any other financial product, even PPF should be relevant for your financial goals. (read about goal based investing to better understand relevancy of different products for different financial goals)

PPF can easily form the bedrock* of a long-term (goal) portfolio’s debt part. And retirement is one such long-term goal. Though for young people, an intelligent asset allocation would be skewed more towards equity (for growth) than debt (for stability), PPF can still be the stabilizing factor of an equity-heavy portfolio.

*PPF’s role may be lesser if you are already investing in EPF or VPF.

And since we are talking about the recent rate cuts, its also true that no one can be sure that rates will never rise again. The possibility of rate falling more in future is no doubt high. But when rate cycle turns around, products like PPF will stand to benefit.

Download Excel-based PPF Calculator (2019) here

Don’t Compare PPF with Equity. Both are Necessary.

As I said earlier, many people are having doubts about PPF when equity MFs and ELSS schemes are giving good returns.

Infact, when tax season comes, you can find truckloads of people getting into which is better ELSS vs PPF kind of debates. And honestly, such debates are useless.

Equity has given higher returns than PPF in recent past. But does it mean you should be in equity 100%? The answer is ‘No’.

Equity returns are volatile. It can give stellar returns one year and bury you underground the very next year. Many people make the mistake of assuming that good returns of recent past will continue forever. It has never happened. It will never happen. At times, equity will perform better than debt products like PPF. And at times, PPF will do better than equity. You can see it for yourself. Here is the historical comparison of last 10 years:

PPF Vs Equity Stocks

A product like PPF, which offers guaranteed steady returns – can be a good hedge for fluctuations in the other parts of your portfolio.

But every goal requires proper asset allocation between equity and debt. Its not Equity Vs PPF kind of question. Rather, its ‘how much equity’ and ‘how much debt’ question (popularly referred to as – deciding the asset allocation).

Both assets have their own purpose in the portfolio. Equity is for growth and debt (PPF kinds) is for providing stability.

Balance is necessary. And the exact balance might be different for different goals and different people.

Sidenote About EPF and VPF

The basic idea behind any provident fund (be it PPF, EPF or VPF) is to help individuals save money for their retirements. In that respect, EPF (+VPF) too is a decent option but only available for salaried individuals. So if the interest rate offered by VPF is higher than PPF, then it makes sense to invest more in VPF rather than PPF. As for those outside EPF coverage, PPF is the only option.

But there are a few other things to make note of here.

PPF has a lock-in of 15 years (though partial withdrawals are allowed), whereas VPF (alongwith EPF) can be withdrawn when you switch or quit jobs (though taxable if 5 years not completed). Liquidity wise, EPF wins. But this flexibility comes in way of real wealth creation. People withdraw money from EPF+VPF while switching jobs and use it for non-essential expenses. This breaks compounding and eventually, that hurts the final corpus size. So you don’t get as rich as you could have. 🙂

What to do Then?

Now what I say next is very important.

Given its 15 year lock-in and restrictions on partial withdrawals, PPF is obviously best suited for long term goals. And you also know that PPF is a pure debt product.

But there is another thing that we know – that for long term goals, equity is the best option. Isn’t it? After all, historical records clearly prove that equity has beaten all other asset classes when it comes to long-term returns.

So what to do then?

The answer is that you need to be clear about your financial goals first. Really. This might sound too text-bookish or unimportant, but you really need to be clear about your financial goals. Also, you need to know how far away the goals are in future.

If it’s a long-term goal like retirement and atleast 15-20 years away, then you need to be intelligent about your asset allocation.

100% equity or 100% debt is a big no-no. Maybe, investing 70-80% in equity and 20-30% in debt is the way to go for such goals. And for debt, your PPF (and EPF) can be a good choice (and PPF can be used to save up a lot of money if you know how to – Read this detailed article on How to save Rs 1 crore using PPF and become a PPF crorepati). You can also go for debt funds but remember that returns are not guaranteed there (though still reliable enough).

For shorter-term goals, investments should be more in debt. For example – a goal that is 3 to 5 years away might demand 20-40% in equity and 60-80% in debt. The exact percentage might differ depending on the individual’s risk appetite, goal criticality and other factors. But PPF is not suitable for such short-term goals due to its restrictions. RD / FD / Debt funds might be better choices for such goals.

Debt funds can also be considered when someone is nearing retirement and wants to slowly reduce equity exposure. This is when a long-term goal is turning into a short term one.

Final Words

Now everyone’s financial situation is different and hence, advice might differ. But generally speaking, one should have higher equity exposure for long-term goals and higher debt exposure for short-term goals.

Talking specifically of long-term goals, PPF is a good choice* for debt component of your goal portfolio. People don’t like its liquidity restrictions but that is exactly what helps bring in necessary discipline when saving for such goals. But having said that, debt (or PPF) alone will not be enough for long term goals like retirement. These are best served by higher equity allocation.

*Ofcourse only upto Rs 1.5 lac (for investing more in debt, you need to look at debt funds / bonds / deposits / etc.).

So don’t worry too much about the recent rate cuts of PPF. It might go down even lower in near future. Focus instead on – identifying your goals, finding the correct asset allocation for each goal(s) and then, investing as per each goal’s requirement. As for PPF, it still is an excellent debt investment for your long-term goals.

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Written by Dev Ashish

Founder - Stable Investor Investing | Personal Finance | Financial Planning | Common Sense

11 comments

  1. Any recommendations if it’s worth going for nps (under employer contribution) as it will help me save 30% tax and also would contribute to my debt component?

    1. NPS is becoming more and more popular because of its equity exposure and its almost ILLIQUED. so it will ensure it will grow with higher returns and you are not allowed to withdraw more than 20 % before 58 years for (Tier -1), so a certain amount of your savings should be allocated to NPS for purely retirement goal.

      1. Sadly, tax treatment at the end is still not something to write about. 🙁
        I think I will write a detailed post on NPS soon.

  2. If PPF has lock in of 15 years it must be compared to 15 years return of equity. Nothing to mention who wins

    1. Hi Dinesh

      I think debt and equity have different purposes in a portfolio. Both are needed to construct a stable, growing and a risk-adjusted portfolio. Ofcourse the asset allocation will be different for different people.

      But…

      Can debt beat equity (in returns) in long term? The answer is safely No.
      Can equity provide the stability of debt? The answer again is No.

      So both are needed for most people. 🙂

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