Yesterday, I was talking to a young relative of mine about how Sensex had touched 39,000 for the first time and how it had created immense wealth for investors in past years.
But despite being young, this guy was somehow not too convinced about equity’s potential for wealth creation.
So I thought I will try to influence him with some simple data. And once I did that, his mind started working in ways that I liked. Mission accomplished. 😉
I thought of sharing that dataset here.
It’s fairly simple to understand:
Imagine you can invest Rs 1 lac every year. So over a period of 20 years, you would be investing a total Rs 20 lac.
Now, what would be the value of these investments over the years?
I took the Nifty50 returns data of the last 20 years (since 1997-98) and showed the below table to my relative:
After investing Rs 20 lac over 20 years, the value of investments was about Rs 90 lac. This is when the investments were made in January every year.
A large figure of Rs 90 lac excited this relative of mine. But he had a valid question after that.
Since markets fluctuate, what would have happened if instead of investing in January, he invested in some other months?
So I showed him the data for months of April, July and October. Have a look.
By investing Rs 1 lac in April every year in Nifty50 for the past 20 years, the value of investments would have become Rs 87 lac. Not bad.
By investing Rs 1 lac in July every year in Nifty50 for the past 20 years, the value of investments would have become Rs 92 lac. Not bad at all.
By investing Rs 1 lac in October every year in Nifty50 for the past 20 years, the value of investments would have become Rs 94 lac. Not bad again.
Ofcourse the figures differ depending on the months we invest in. But the final figure still is good enough to show how wealth is created over the years when investing in equity.
And just to drive home the point, I also compared this with Rs 1 lac investment in PPF for the last 20 years. Here is what I found:
By investing Rs 1 lac every year in PPF for the past 20 years, the value of investments would have become approx. Rs 52 lac. Not bad but much lower than what was possible via equity.
Please don’t think that I am trying to portray PPF in a bad light. I personally like PPF and feel thatPPF is a great debt product.
So if you understand the whole premise of asset allocation and also understand the need to have debt in the investment portfolio, then PPF is a great option. (Try thisPPF excel calculator). But ignoring equities just because it can be volatile in short term is not wise.
Equity will go up as well as down. It is in its nature. It’s not a bank FD. But if you stick to it for long, the returns delivered are much higher than debt products.
And that is what I wanted to convince my relative about.
He seems to be convinced now. Whether he takes any action on this new found conviction is another matter.
I also shared with him the idea of investing on a monthly basis viaSIP in equity funds if he (like most people) doesn’t have lumpsum amounts to invest. He got inspired by the severalSIP success storiesthat one can easily find.
So if you too feel that someone needs a little push to consider equity for long term investments, then you can use the examples above to convince them.
This is a common question that I am asked quite often, more
so during the tax saving season.
Choosing between the ever so popular Public Provident Fund (PPF) and Equity-linked Saving Schemes (ELSS).
To be fair, comparing one to the other isn’t exactly
correct. But I will get to that in a bit.
If you think about it, the main motive behind such PPF vs ELSS questions is fairly obvious – the more tax you pay, the less money remains in your hands. So you will naturally try to find ways to save more taxes. And if these tax saving efforts can help you earn good returns, then nothing like it. Isn’t it?
Unfortunately, people want a clear-cut, crisp,
one-word answer to such ELSS vs PPF questions.
But that’s easier said than done. Things aren’t
always black and white. There are hundreds of shades of greys in between.
Another question derived from the earlier one is whether doing SIP in ELSS funds is better
than investing in PPF every month?
Those who are risk averse obviously feel PPF is a better savings option. While those who have got good returns from ELSS funds in the past (or know that equity is the best asset to create long-term wealth) advocate going for SIP in ELSS funds.
And here is an interesting fact: the number of such PPF vs tax saving ELSS debates
rises during the tax saving season. JPeople are in a mad rush to do some glamorous,
last-minute tax savings and portray themselves as financial superheroes!
But last-minute tax saving efforts near the end of the
financial year is a recipe for disaster.
But let’s not digress and instead focus on the main questions
at hand:
Is ELSS mutual fund better tax-saving investment option than PPF (Public Provident Fund)? Or
Is PPF better tax-saving option than ELSS funds (Equity Linked Saving Schemes)?
No doubt both are very popular.
And when you ask people about the best tax saving
investment options, chances are high that you will get either ELSS or PPF as
the answer.
But as I said earlier, there is no perfect or one clearly
defined right or wrong answer to this debate.
Ofcourse if you pick just one of the several parameters,
you are bound to find one clear winner. But that is not the right approach.
But let’s begin the comparison anyway…
Most people prefer to compare returns.
Unfortunately, that is neither wise nor a fair
comparison.
PPF
as a product is extremely safe and gives assured returns whereas returns
from ELSS depend on the performance of the stock markets. So the returns of
ELSS can be very high or very low and fluctuate somewhere in between.
Both are completely different products and target
different needs of a portfolio. So we shouldn’t even be comparing them!
But people do and will continue to compare.
And one very big reason why people compare them is that both have a good and instant side-effect of providing tax-saving… that too under the same Section 80C of the Income Tax Act. Hence people tend to compare.
I know what you are thinking.
Firstly, we are concerned about tax-saving. Right? That’s
common between ELSS and PPF. So nothing much to compare.
Next obvious choice is to compare returns. What else
could it have been?
You are right to an extent.
But I am of this view that all investments should be linked to financial goals. Tax saving should not be the prime motive for most investors (Talking of goals, if you still aren’t sure which goals you are or should be targeting, I strongly suggest you use this FREE Excel-based Financial Goal Planner to find out what your real personal financial goals are.)
Your goals and investment horizon play a major role
in defining how you invest. If investing for long-term goals, the investment
portfolio should ideally have a larger equity component. Whereas when saving
for short-term goals, it should be a less volatile and debt-heavy portfolio. The
asset allocation differs for different financial goals. That’s how it should
be.
I will not delve into the full details of what PPF
is or what tax-saving ELSS funds are. I am sure you already know most things
about them. But just to recap a bit:
PPF (or Public Provident Fund) is a government-backed debt product that assures returns that are declared from time to time. How much to invest in PPF to save tax? A maximum of Rs 1.5 lakh can be invested in lump sum or installments in one financial year. The lock-in period is 15 years and the account can be extended in blocks of 5 years multiple times after the original 15-year maturity period is over. Tax benefits for investment in PPF under Section 80C are limited to upto Rs 1.5 lakh.
ELSS (or Equity Linked Savings Scheme) is a diversified mutual fund that invests in stocks and also offers benefits under Section 80C. There is no limit on maximum investment but tax benefit is available only on Rs 1.5 lakh. The lock-in period is 3 years. Returns are neither guaranteed nor assured. They are market linked and (average returns) tend to beat inflation in the long term.
Comparison of Returns – ELSS vs PPF
As I have already said, comparing returns of PPF
with ELSS isn’t 100% correct.
Both have very different investment objectives.
PPF is a debt product whose returns are fixed but
limited due to its very nature. There is no potential for positive or negative
surprises. You get what you are promised by the authorities. ELSS, on the other
hand, is an equity product that aims to maximize returns. To achieve this aim,
it takes risks which can turn out well at times and not turn out well at other
times.
To give you some idea about how returns in ELSS
funds and PPF differ every year, I have tabulated the annual returns of some of
the popular tax-saving ELSS mutual funds in the table below:
The data has been sourced from Value Research. This is not a perfect comparison but is still good
enough to give you a comparative snapshot. You can compare the year-wise
returns and average category-return of these ELSS funds with PPF annual
interest rates. This table will give you some idea about how the returns vary
in reality, so I suggest you spend some time on it.
And the funds above are one of the best ELSS funds
that have been in existence for last several years now. But do not think of
this as an advice of best-ELSS-funds-to-invest kind of list. The data is just
for illustration purposes.
But nevertheless, read the observations below:
PPF returns have mostly ranged from 8.0% to 8.7% in the recent past. To know more about PPF account interest rate in different banks, check the updated latest PPF interest rates.
The years with green colored PPF-return grids indicate that the PPF was the better performing when compared with other ELSS funds in that year. Like in 2008, PPF delivered 8% whereas the chosen set of ELSS funds gave average returns of -54% with individual funds delivering anything between -48% to -63%. Similarly in 2011, PPF did better than ELSS schemes.
The years with red PPF return grids show that ELSS gave higher returns than PPF in those years. For example: in 2017, ELSS returns ranged from 26% to 46%. Obviously PPF couldn’t match that with its 8%.
The smaller grids (max/min) show the maximum and minimum annual return for different ELSS funds for that given year.
It’s clear from above that depending on the market conditions,
the ELSS returns can have wild fluctuations. PPF returns on the other hand are
more or less constant due to government’s blessings.
So where PPF returns average around 8%, tax saving
ELSS mutual funds have the potential to deliver a much superior return – a 12%
to 15% average returns is possible, but not guaranteed. And the top best ELSS
funds have given much better returns than these average returns.
So does it mean that you should simply dump PPF and
start investing everything in ELSS funds?
Ofcourse not! The average return comparison of ELSS and PPF does seem to show that ELSS offers superior returns in the long run. But basing your investment decisions only on one factor is very risky. Here’s why.
Let’s check another aspect before we get judgmental.
I have simulated Rs 10,000 monthly investment in Franklin India Tax Shield Fund* starting
from January 2008 to December 2018. This is to be compared with Rs 10,000 per
month savings in PPF for the same period.
*Chosen randomly
from several ELSS funds. Don’t consider it as a recommendation.
The value of investment in Franklin’s ELSS fund at the end of 2018 would be about Rs 29-30
lakhs. On the other hand, the value of PPF corpus is 20-21 lakh.
Once again and maybe not surprisingly, it seems ELSS
is the way to go.
You can also say that in the above case, the
PPF-investor has actually lost out on more than 50% extra returns. (Rs 30 lakh
– Rs 20 lakh)
I have compared Rs 10,000 monthly SIP in Franklin Tax Shield vs monthly 10,000
savings in PPF starting from April 2007 (when the bull run was about to peak in
coming months).
I chose that starting point because due to high
returns from equity in recent past (2004-early-2007), many people would be
attracted to stock markets and would be interested in ELSS – as it combined tax
savings with much higher returns than PPF.
So here is a 2-year story – starting from April 2007
to March 2009:
In 2 years, the total contribution would have been
Rs 2.4 lac in each.
And the value of ELSS investment would be Rs 1.6 lac
and that of PPF would have been about Rs 2.6 lac (yellow cells in the bottom
row).
Now think…
We know equity will do well in long term. That is
what has been told and proven countless times
But how many people would remain convinced and loyal
to that idea when their Rs 2.4 lakh investment goes down to Rs 1.6 lakh after 2
years?
They might be cursing themselves for ignoring PPF
that would have saved them from such losses.
And this is what I wanted to highlight.
And no PPF vs ELSS calculator or SIP vs PPF
calculator will tell you this. All such ELSS SIP investment calculators work on
the principle of average returns which will not show the real picture.
Just looking at historical average returns, you might feel that investing 100% of the money in stock markets is the right way. But when markets correct, not many people have the ability to stay invested and accept the temporary losses, even though it is best for them.
Looking at the average long-term returns in
isolation can give the wrong picture. Equity investing (directly or via mutual
funds) does need a lot of will power to remain invested when markets are down.
Not many people have it.
So is it better to
invest in ELSS mutual funds SIP than in PPF?
It is true that
investors of ELSS mutual funds are rewarded for accepting the short-term
volatility. They are paid back handsomely as average return table above suggests.
But when you invest in markets, you will face periods of stock market
volatility every now and then. Like in 2008, the ELSS category fell by almost
50%. Again in 2011, the category average was about -24%.
Equity is perfectly fine for long-term investors and
equity funds have given much better returns than PPF over long-term. But you
just cannot ignore debt (like PPF) as the investors have different responses to
volatility. Some might exit ELSS after 20-30% losses (which is normal in
equities).
Another factor is that you don’t have to ‘choose’
anything in PPF. It’s simple.
But in ELSS funds, you have to choose the fund among
many available ones. Is there any guarantee that you will be able to choose the
right ELSS fund that will do well in future? Think about it. What if you picked
the wrong funds?
That was about the
comparison of investment returns of PPF vs ELSS mutual funds.
Let’s see other
factors.
Tax Benefits on investments in ELSS Vs PPF
Both ELSS and PPF
are quite tax efficient.
Under the Income Tax
Act Section 80C, investment in ELSS mutual funds and PPF (Public Provident
Fund) give you a full tax deduction upto Rs 1.5 lakh every financial year.
Under Section 80C, you cannot claim deduction of more than Rs 1.5 lac when investing in ELSS or/and PPF and/or other section-80 tax saving options.
Also, you cannot
invest more than Rs 1.5 lakh in a PPF account in a year. But this restriction is
not there in ELSS schemes. You can invest as much as you want, but the tax
benefits available will be limited to Rs 1.5 lakh.
And let me answer
two more questions that you might have:
A PPF account has a
maturity period (lock-in) of 15 years. ELSS funds on the other hand have a lock
in period of only 3 years. But wait. There is more to know than just that…
Assuming you make
annual investments in PPF, only your first installment in locked-in for 15
years. The 2nd year installment is locked-in for 14 years. The 3rd year
installment is locked-in for 13 years…and so on. Also, the PPF accounts that
have completed 15-year lock-in and have been extended have a fresh lock-in of
only 5-years.
In ELSS, each SIP
installment has its own 3-year lock-in. many people get confused here. Do not
think that lock in is valid on full amount that you have invested from the date
of first investment in ELSS.
So first SIP in
April 2017 will be locked in till April 2020. Second SIP in May 2017 will be
locked-in till May 2020. And so on…
But let me remind
you that equity is best suited for long-term. Like for periods exceeding 5
years. The money is locked for only 3 years in an ELSS fund. But even if the
lock-in gets over after 3 years, you shouldn’t withdraw the funds and remain
invested for as long as you don’t need the money.
As investors you need to be very clear that the asset that you are investing in is equity and thus you should be ready to stay invested for at least 5 to 7 years to get good returns.
What if you Invest 100% in PPF or 100% in ELSS?
These type of questions come from people who are unwilling to see the
bigger picture and are only narrowly focusing and asking about PPF vs mutual
funds which is better?
But neither approaches is advisable.
Is PPF a good option for investment?
Is ELSS a good option for investment?
Ofcourse yes.
But theoretically speaking, if you invest Rs 1.5 lakh in PPF every year for 15 years, your total corpus would be around Rs 43 lakh. You can use this Excel PPF Maturity Calculator to try out other scenarios (or find out how to save Rs 1 crore in PPF).
Regular SIP in equity funds (both ELSS and non-ELSS) can create a lot of wealth in long run. Here is a good real-life success story of SIP-based Wealth Creation. To know how much wealth you can possibly create by investing small amounts every month, check out the following links:
Again, you might
feel that why to use PPF when you can get more returns with ELSS.
But remember, PPF is
a debt product and ELSS is an equity product. All goal-based investment
portfolios are best constructed by diversifying across assets.
You should not be 100%
in equities or 100% in debt.
It is not sensible
either way.
For most people, the best approach is to invest in line with your goal requirements. Using the powerful concept of Goal based Investing, you find out how much you should be investing for each goal.
Let’s assume that the goal you have in mind is retirement planning – which is a nasty problem in itself.
It’s a big goal. And
since for most people its decades away, its best served by an equity heavy portfolio.
For someone in 30s,
it can be safely said that a portfolio with 70% equity and 30% debt is
suitable.
And you also wish to
save tax. Right?
So here is how to go
about it:
You are investing for your financial goal of retirement planning.
After doing some calculations yourself (or taking help from an investment advisor), you have come to know that you need to invest Rs 20,000 every month in 70-30 Equity-Debt ratio.
That means investing Rs 14,000 in equity and Rs 6000 in debt every month.
But you are already making an EPF contribution of Rs 4000 every month. That also counts towards the 30% debt bucket.
EPF takes care of 48,000 under Section 80C tax saving options. Assuming you have a Rs 1 crore term insurance with Rs 12,000 annual premium, the total eligible deduction goes upto Rs 60,000 (48K+12K).
The remaining Rs 2000 per month (from debt) can be put in PPF. Or if you have the option of VPF, that’s better too. This totals to Rs 84,000.
And this increases eligible deductions to Rs 84,000 (48K+12K+24K). You need another Rs 66,000 for fully utilizing Section 80C limit.
You can now do a Rs 5500-6000 SIP in ELSS fund. That will take care of your tax-savings.
For the remaining Rs 8000-9000 (in equity bucket of Rs 14,000), you can choose other normal equity funds (non-ELSS). Or you can even do full Rs 14,000 SIP in ELSS funds.
And if you think
like that, then you will easily get answers to questions like ‘how much should I invest in ELSS’ and ‘how much should I invest in PPF’?
But you don’t need
to decide between PPF and ELSS because of just returns.
You instead simply need
to focus on asset allocation (which is 70-30 in the above example). Therefore,
the choice between doing SIP in ELSS funds and investing in PPF must also be
seen in the context of overall portfolio asset allocation.
If there is room
under the 30% debt bucket after deducting EPF contributions, you use PPF. For
equity’s 70% bucket, you can use ELSS to the extent it is needed for tax
saving.
And if your Section 80C limit of Rs 1.5 lac is fully utilized using EPF contributions, life insurance premiums and home loan principal repayment, there is no need for ELSS mutual funds investment. You can easily focus on non-tax saving equity funds instead.
But that doesn’t mean that you don’t invest for your goals. Tax-saving
is not a financial goal. Just remember that.
The approach that I discussed above is in line with goal-based
investment’s philosophy.
One simpler approach can be to take a middle path and do a 50-50 split
between PPF and ELSS.
Another can be (for those who are interested in being more tactical
about tax-saving) to use market valuations as an indicator to decide where to
invest. If valuations are low, invest in ELSS. If valuations are very high,
invest in PPF.
I am not suggesting that the tactical approach discussed above is a better way. Just highlighting that there can be multiple approaches. But most people are better off not trying to time the markets. 🙂
But the actual split between ELSS and PPF will depend on factors like
your risk profile, existing assets, etc.
Just to reiterate, if you are young, keep a larger portion of your savings directed towards equity when investing for long term goals like retirement.
Both ELSS and PPF are suitable for retirement savings. But equity is
better suited as long as you have several years left for the goal.
How to choose good Tax-Saving ELSS Mutual Funds?
Before even you consider ELSS as the choice for tax saving, do not
forget that always invest in ELSS with a long-term perspective – something like
5+ years or even more.
Why?
Because ELSS is about equity investing. And equity as an asset class
isn’t risk free. There is always a risk of loss of capital. But this risk is
higher when you invest for short term. The longer your investment horizon, the
lower is the risk of loss.
With that aside, how do we go about picking the best ELSS funds among
all ELSS mutual fund schemes out there?
These days, the disclaimers about past performance not being
necessarily sustained in the future fall on deaf ears.
So despite mutual fund companies highlighting great short term returns,
you should focus on things that matter.
When looking for which ELSS funds to invest in for tax saving, keep the
below discussed points in mind.
Depending solely on performance numbers from recent past can be misleading. Do not run after previous year’s best performing tax saving ELSS funds. Look for consistency in returns over several years. Has the fund been in the top quartile of its category for almost all the years? Has the fund protected the fall in poor markets? These are just some of the questions that should come to your mind when picking ELSS or building a proper mutual fund portfolio. You can even consult an investment advisor to find out these answers.
Also, all ELSS funds are not the same in terms of portfolio
construction.
All ELSS funds are actively managed and its fund manager’s job to
decide what to hold in fund’s portfolio. It can a portfolio with a bias towards
large cap, midcaps, all caps or whatever.
What is worth remembering is that one ELSS fund’s investment mandate
will not be the same as that of the ELSSs out there.
And there is absolutely no need to pick a new ELSS fund every year for your
tax saving.
This often happens when you do last minute tax saving. You are in a hurry and want to find out the best performing ELSS fund on the basis of 1-year return. This is not advisable.
Over the years, investors end up with several ELSS schemes as they
invest lump sums every year by picking one from the best performer of previous
years. Like picking from Top ELSS Funds of 2018 or Top ELSS Funds of 2019.
But having more than 1 or 2 ELSS funds is useless. In any case, if you have other non-tax saving diversified mutual funds, having more ELSS funds will only lead to an overlap in your portfolio. Building a mutual fund portfolio isn’t tough but still people mess it up.
So don’t wait for January, February or March for planning your tax
savings.
Do some homework earlier and find out how much is to be invested in ELSS in the year. And then begin investing in ELSS through SIP (systematic investment plans). This way, you would have time to pick good ELSS funds on the basis of long-term consistent performance. You will also benefit from averaging (and avoid timing the market through last minute lump sum investments).
We began this article with the question of whether to invest in PPF
or ELSS to save taxes.
You should not decide randomly between ELSS or PPF. And there is no
one-size-fits-all answer as both ELSS and PPF target different needs of the
investment portfolio.
The decision should be made after you have a clear view of your financial
goals and tax requirement.
But when it comes to combining equity investing with tax saving, there
is no doubt that ELSS is good for long term investments. It scores well
above several other tax saving products. And investing in ELSS through SIP (or
systematic investment plans) over a long time horizon can help you do proper
tax planning and financial goal planning.
If you have a well-thought out investment plan for your financial goals, you will not need to ask questions like which is a better investment option ELSS or PPF?
You don’t need to choose between the most suitable tax saver between ELSS vs PPF. That is because you will invest on basis of your goal-specific strategic allocation rather than randomly. And that is what goes a long way in sensible investment management and wealth creation. So taking sides on ELSS vs PPF is fine. But invest smartly and using correct goal-based approach.
Rs 1 crore is still not a small amount. But whether it is sufficient or not depends on why you actually need it.
So for example, if you were to ask me whether Rs 1 crore is enough for retirement? In most cases, the answer would be a No. Retirement planning is a nasty problem and you can’t just ahead with random numbers for your retirement corpus.
But still, there is a psychological attraction to this figure of Rs 1 crore and becoming a crorepati that us Indians can relate to.
PPF is a beautiful debt product. I have already written about it earlier too (link).
And even though investing in equity is a necessity and highly advisable for the long term, a product like the PPF can still be a part of the overall portfolio. And I am sure the term PPF crorepati in the title would have already captured your interest by now. 🙂
However, PPF is not a short term investment option as it has a lock-in period of 15 years. But still, you can make partial withdrawal after few years. And You can even extend the maturity by a block of 5 years for multiple times. It currently falls under the ‘EEE’ category, which means that PPF contribution, interest earned on PPF and PPF maturity proceeds are exempted from tax.
Interestingly, a few days back I got a mail from a self-confessed conservative investor.
He said that he was slowly increasing his equity investments. But still he felt that he cannot part ways with something as sure-shot and as risk-free as a PPF account. And he wanted to know how long would it take to accumulate Rs 1 crore in PPF?
I felt that this question might interest others as well.
So this post is about finding out:
How to accumulate Rs 1 Crore in PPF (Public Provident Fund)?
And if you are low-risk conservative investor who wishes to accumulate Rs 1 Crore, then PPF is a decent option.
Let me try to answer this from various perspectives:
If you contribute Rs 1.5 lac every year for a period of 15 years, your PPF balance will be about Rs 43.9 lac at the end of 15 years (assuming a stable interest rate of 8.0% per annum).
If you contribute Rs 1.5 lac every year for a period of 15 years and then don’t liquidate your holding for another 15 years, then your PPF balance will be about Rs 1.39 crore at the end of 30 years (assuming a stable interest rate of 8.0% per annum). You will achieve the target of Rs 1 crore around the 27th year.
If you contribute Rs 1.5 lac every year for a period of 15+5+5+5=30 years, then your PPF balance will be about Rs 1.83 crore at the end of 30 years (assuming a stable PPF interest rate of 8.0% per annum). And you will reach Rs 1 crore during the 24th year itself.
But what if you are unable to invest Rs 1.5 lac every year (the full PPF annual limit), then obviously your target of reaching Rs 1 crore in PPF will be delayed accordingly.
Also, if the interest rates go down in years to come, then once again your target of reaching Rs 1 crore in PPF will be delayed to that extent.
So to sum it up, you can become a crorepati if you put Rs 1.5 lac every year in PPF then you can accumulate a corpus of Rs 1.08 crore by the end of the 24th year (assuming that 8% return)
But as you know, neither the PPF limit remains same nor PPF interest rates remain unchanged over the long term.
So let’s try a hypothetical scenario which might actually play out in the near future:
Suppose you begin saving full Rs 1.5 lac in PPF today. Government increases the annual PPF investment limit by Rs 50,000 every 5 years. It is assumed you will continue to invest as much as is needed to fully utilize the annual investment limit of PPF every year. The interest rates also reduce by an average 0.5% every 3 years or so.
What will be the result then?
At the end of 15th year, your total investment of Rs 30 lac would have become about Rs 49.4 lac.
If you continue investing (after extending your PPF account with contribution) for another 5+5+5=15 years, then at the end of 30th year, your total investment of Rs 82.5 lac would have become about Rs 2.02 crore.
Here is the tabular depiction of the excel:
As you might have observed by you, it is only after the initial few years that the actual compounding of the PPF investments becomes visible. And it is for this very reason that you should try not to disturb (withdraw from) your PPF account for as long as possible and try to extend its tenure after the first 15 years lock-in period.
Do you want to try some different scenarios of your own?
You can do so.
You can download this FREE Excel PPF Calculator and play around with inputs. If the previous link doesn’t work, use the link below:
You can even check out historical PPF interest rate and how things have changed in the past when it comes to PPF.
Now, the current limit for PPF is Rs 1.5 lakh per year.
But what if you want to invest more?
Obviously, you need to respect the limit.
But if both husband and wife can contribute to PPF, then things can get fastened a bit.
Save Rs 1 crore Quickly using Husband PPF + Wife PPF
What needs to be done is that a PPF account needs to be opened for both you and your spouse.
Since both the husband and the wife can deposit Rs 1.5 lakh per annum, it means you can contribute Rs 3 lakh every year in PPF. And you will get interest in both these PPF accounts for the entire period of 15 years or more if extended.
So how much do you end up with if both you and spouse contribute Rs 1.5 lakh every year for 15 years?
The answer is Rs 43.9 lakh each, i.e. a total of Rs 87.8 lakh.
So if both of you save diligently, you can achieve Rs 1 Crore in about 17 years. Here is a sample depiction of PPF Husband Wife calculation:
So if you are a conservative investor, who isn’t much interested in volatile investment options, then PPF can be helpful. PPF can help you become a crorepati in a safe way.
If you put Rs 1.5 lakh every year in PPF, then you can accumulate a corpus of Rs 1 crore by the end of the 24th year.
If both you and your spouse put Rs 1.5 lakh each every year in individual PPFs, then you both accumulate a corpus of Rs 1 crore by the 17th year itself.
And if somehow you manage to continue investing for the 30 years (i.e. 15 years original and 3 extensions of 5 years each), then you will be able to accumulate a really big corpus.
So before I close, let me list down some facts about the PPF for your ready reference:
Extension of PPF Account – After the maturity period of the original 15 years, it can be extended in blocks of 5 years each multiple times
Minimum deposit amount (per year): Rs 500
Maximum deposit amount (per year) : Rs 1,50,000
Number of installments every year: 1 (min) to 12 (max)
Number of accounts an individual can open: Only 1. If there is a 2nd PPF account, it is treated as invalid and doesn’t earn any interest.
Tax Savings – EEE status, i.e. the annual contribution (up to Rs 1.5 lakh) provides tax benefit under Section 80C. Interest earned and the maturity amount is fully exempted from taxes.
Interest on PPF is calculated on the minimum balance in the account between 5th and the last day of each month. So if you invest monthly, then it makes sense to do it before 5th every month.
You can further maximize your returns in PPF by investing the full amount at the beginning of the financial year itself. Ofcourse this is not easy for everyone. But if you do so, the full amount earns interest every month of the year.
Here is the link to download the free excel-based PPF Calculator again:
Investing in equity does come with its own share of ups and downs in the near term. But if you look at the average annual returns of Indian Stock Market, then it will show how you can create some serious wealth from equity. The idea of this post was to tell how a comparatively safe and risk-free savings option like PPF can be used to accumulate a large corpus of PPF Rs 1 crore.
For most people, its advisable to have a balance between equity and debt when investing for long.
But if you aren’t sure whether you are saving and investing properly, do get in touch with an investment advisor soon (how?).
Are you looking for a PPF Calculator that uses latest PPF interest rates (2019-20) to calculate the interest earned on PPF investments?
And you also want to know the answer to the big question – what will be PPF maturity amount?
If the answer to above questions is yes, then here is something that you will find useful.
I have created a comprehensive Excel-based PPF calculator that calculates the maturity amount and interest earned depending upon the type of investment you make (fixed or variable) in your PPF account. It also shows you the interest earned every year in the PPF account.
PPF (or Public Provident Fund) needs no introduction.
It is one of the most popular investment-cum-tax saving option among Indian savers.
It’s a tax-deductible investment option that offers reasonable tax-free returns to savers. And it is among the very few risk-free tax saving investment option for us Indian taxpayers (as it provides tax benefits under the Section 80C).
Many people ensure that they utilize the full investment limit of their PPF accounts every year. So naturally, they are concerned about the rate of interest on their PPF accounts and also about estimating the final PPF maturity amount.
I have created this excel based PPF calculator that can be useful if you wish to estimate how much money can be accumulated using your PPF account.
Using this calculator, you will easily find answers to questions like how much you can invest in PPF? How much interest is earned by PPF account? How will the investment grow over the years? The final PPF maturity amount?
And since you can control the investment as well as maturity tenure in the excel sheet, it can be your goto option if you are searching for:
PPF calculator for 15 years, or
PPF calculator for 20 years, or
PPF calculator for 25 years, or even
PPF calculator for 30 years
All you have to do is to provide few inputs and this PPF excel sheet will tell you everything you need to know about your PPF investments.
Decide your PPF investment frequency(Monthly, Quarterly, Half Yearly, Annual)
Decide till when you wish to keep investing in PPF(15, 20, 25 or 30 years)
Decide when you finally wish to withdraw money from PPF(end of 15th, 20th, 25th or 30th year)
PPF accounts are opened for an initial term of 15 years and once the lock in period of 15 years is over, the subscriber can withdraw the full amount at the time of maturity.
PPF account withdrawal rules allow for partial withdrawals even before the 15-year lock-in is over. But we will ignore that scenario as we are concerned about estimating the maturity amount of an undisturbed and a fully funded PPF account.
Luckily, PPF rules allow that the account can be extended in blocks of 5 years.
PPF Subscribers can choose whether they want to extend with contributions or without contributions. So if you decide, you can continue investing even after the 15th year.
So using the two inputs of your investment period and maturity/withdrawal year in the calculator, you can figure out the final maturity amounts for the following combinations:
Invest in PPF for 15 years. Withdraw at end of 15th year
Invest in PPF for 15 years. Withdraw at end of 20th year
Invest in PPF for 15 years. Withdraw at end of 25th year
Invest in PPF for 15 years. Withdraw at end of 30th year
Invest in PPF for 20 years. Withdraw at end of 20th year
Invest in PPF for 20 years. Withdraw at end of 25th year
Invest in PPF for 20 years. Withdraw at end of 30th year
Invest in PPF for 25 years. Withdraw at end of 25th year
Invest in PPF for 25 years. Withdraw at end of 30th year
Invest in PPF for 30 years. Withdraw at end of 30th year
Apart from this, the calculator also gives the option of setting the annual investment limits and interest rates (yellow cells) for each year separately.
Both the PPF account interest rate and annual investment limits can be varied for each financial year.
This is useful as the government is known to increase the maximum annual limit of PPF deposit every few years.
Currently, the maximum PPF investment limit per year is Rs 1.5 lakh. You can try out scenarios where this annual PPF limit is increased by say Rs 50,000 every 3-4 years.
Note – The calculator assumes that you would invest the full amount as prescribed by the limit. But you can play around with the excel sheet and bypass this restriction yourself.
The PPF interest rates too don’t remain same forever.
But the rate of interest in PPF account in post offices, banks or anywhere else is same at a given point of time. The calculator shows it at 8% for all years 1 to 30. In reality, this will not happen.
The currentPPF interest rate is 8% (in 2019-2020). But as per current PPF account rules, the government has the option of changing PPF rates every quarter now.
The PPF interest rates in last 10 years are as follows:
For more information, you can have a look at the historical PPF Interest Rates to get an idea about rate fluctuations and changes in PPF rules in the past.
Note – The interest on PPF investments is calculated on a monthly basis. So all your monthly PPF contributions count. However, the total yearly interest is added to the PPF account at the end of the financial year. This should be remembered when doing PPF interest rate calculation or looking how to calculate PF amount at end of the year. The calculator provided in this post has embedded PF calculation formula in excel which you can download freely.
Realistic PPF Investment Scenario Testing
You can test out various PPF interest rate and investment limit related scenario using this tool.
Using a combination of increasing annual limits and falling rates (rates are expected to go down gradually as the Indian economy matures), you can try out various scenarios yourself. One such hypothetical scenario can be:
Maturity Amount (at the end of 20th year) ~ Rs 71 lakh
Maturity Amount (at the end of 30th year) ~ Rs 1.54 crore
This is an example of using this excel based calculator for estimating maturity amount when monthly investments/contributions are made in your PPF account.
Maturity Amount (at the end of 25th year) ~ Rs 85 lakh
As you see, you can create your own unique scenario basis your views / estimates about the future investment limits and rate of interest on PPF accounts.
So go ahead and play with this calculator to calculate PPF Maturity Value for 15 to 30 years with detailed annual timeline that displays month-wise (or other periodicity-wise) contribution and interest calculation every year in line with applicable PPF interest rates.
I hope you find this Excel PPF interest and maturity calculator useful.
Once you use this PPF Calculator, you will know how to calculate interest on your PPF investment and get an idea about the estimated PPF maturity amount.
Using an online or excel based PPF interest calculator to estimate your maturity amount is fine. But if you are investing for long term financial goals, PPF or other debt instruments might not be enough. You need to have more exposure to equity (why?).
So go on… use this PPF calculator excel xlsx xls sheet and see if you are actually using your provident fund investments (PPF or others) to create wealth or not.
PPF calculator is a very easy way to calculate PPF interest and PPF maturity amount.
And PPF is a solid debt-based savings product that can be used to save some serious money. Don’t ignore it and use it judiciously.
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.
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.
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:
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.
History of PPF interest rates is not very exciting. The changes have been very rare till recently (before the government decided to go in for quarterly revisions of PPF rates).
But in spite of all the noise about other assets, Provident Funds remain the preferred mode of investments for most Indians.
PPF (Public Provident Fund) continues to be looked at as a solid product to create a large corpus over time, with the added benefit of tax savings. As of now, PPF falls under Exempt-Exempt-Exempt (EEE) tax regime. This means that:
1st E – Investment in PPF account up to Rs 1.5 lac per year is eligible for deduction.
2nd E – Interest earned is tax exempted.
3rd E – Maturity amount is also exempt from tax.
Though this EEE treatment of PPF might change in the near future. We will discuss that later in the post.
As evident from the graph above, the change in rates have been rare:
Rates were fixed at 12% between 1986 and 2000 (sounds like heaven) 🙂
Then between 2000 and 2003, the rates slid down to 8%
The rates then remained stable at 8% till 2011
Rates were then revised to 8.6%, 8.8%, and 8.7%.
Last few years saw rates come down to 8.1%, 8.0%, 7.9%, 7.8% and then a historic low of 7.6%.
Rates finally saw an uptick of 8.0%. Again now down to 7.9%.
Now the quarterly revision of rates is allowed.
The PPF interest calculation continues to be done on a monthly basis – on the lowest balance between the 5th day and end of the month. But the interest is credited only at the end of the year. So as far as compounding is concerned, it takes place on an annual basis.
By the way, a little too much importance is given to investing in PPF before the 5th of the month instead of after 5th. But it hardly matters… so relax.
How will PPF Interest Rates be changed now?
PPF is part of the government’s small saving schemes portfolio. So the question who decides PPF interest rate has an obvious answer. 🙂
Earlier, the rates were considered for revision once every year.
But with effect from 1st April 2016, the rates for schemes like PPF, etc. are to be considered for revision every quarter, based on previous quarter’s yield on benchmark government securities (or bonds of corresponding maturities) with a small markup (around 0.25%).
So if yields go down, the PPF rates should go down a few months after that. (and there will be a hue and cry about why the government is not investor-friendly)
If yields go up, the PPF rates should go up a few months after that (and people will cheer as they will benefit from a turnaround in the rate cycle).
But why is it that the government decided to switch from annual to the quarterly revision of rates? Is the government worried about something? Why is it that it wants to bring the rates as close to that of benchmark government securities?
…according to a report in 2011 by Shyamala Gopinath committee (which was set up to review National Small Savings Fund, or NSSF), such a fixed rate regime caused a lot of volatility in collections.
When market rates declined, small savings collections went up as their rates remained unchanged. The opposite happened when market rates went up. This leads to a situation where when market rates are low, states are loaded with high-cost NSSF loans, and when market rates are high, NSSF loans as a source of financing fixed deposits dries up completely. It is therefore, very essential to align these rates with market rates.
In December 2011, acting on the recommendations of the report, the government made returns on small savings schemes market-linked. Rates on these products were benchmarked to government securities (G-secs) of similar maturity periods with a positive spread of 25 basis points.
Now interestingly, banks are affected by changes in the interest rates of these small savings products.
Why?
Because the banks’ own saving products compete with government’s small savings products.
So having a positive markup on PPF, etc. made these products more suitable for customers looking for higher rates and in turn, put a lot of pressure on the banks. So banks have good reason to push for the reduction in rates offered by government products. This is the reason why banks have been lobbying (for years) to get this done. They cannot reduce rates on deposits as that would mean losing out to competition from schemes like PPF (and other short-duration government products)
The New Risk?
Earlier, rates were revised once every year. But now, the revision will take place every quarter.
So there is obviously an increase in interest rate risk as far as PPF is concerned. So in a falling rate scenario and for someone who has a large PPF balance, it can hurt a lot.
But when you compare the current rate with inflation numbers (around 5% to 6%), it still seems to be satisfactory. Isn’t it? After all, inflation of 6% and PPF with a tax-free rate of 7.8% will offer you a real rate of about 2% if not more. And that should work.
But we are missing one very important point – inflation rates published by government and RBI are not exactly equal to our own inflation. 😉
You spend on products that are facing higher price hikes. So your personal inflation might be 10% and not what RBI tells you.
So it’s possible that even with about 8% given by PPF, you are not getting any real returns.
You might feel that if that is the case, why not go for products that are known to given higher average returns (ofcourse with short-term volatility) like equity mutual funds and invest regularly via SIP.
But simply comparing returns of PPF and ELSS Mutual Funds is not correct. PPF is a part of your debt portfolio and equity MFs that of the equity portion of your portfolio. Both parts have their own significance. I will come to this point in a bit…
Now there is another (future) risk in products like PPF.
Future of PPF?
No. I am not questioning the safety of PPF in the future. It is run by the Government of India and hence it is (default) risk-free and extremely safe to invest in – no doubt.
But what about other kinds of risks? What if in future, the PPF is taxed? It almost happened this year for EPF before it was rolled back. But EEE status turning into EET is possible (eventually).
Another risk can be that withdrawal might have certain riders. Say you can’t withdraw the full amount on maturity. Or something similar. After all, the government is getting this large amount of money every year at a relatively low cost (currently 7.9%). So the government will want to reduce this rate and ‘try’ to keep money from going out. That is common sense and that is a future risk for young people like us.
So when you think that the PPF is risk-free, remember that primarily, it is the default risk that you are talking about. Other risks (known and unknown) still remain.
Now don’t think that I am against PPF as a product. It is an awesome product! It should definitely be part of one’s portfolio. But…
PPF is good. But not enough.
Previous generation’s automatic choice of investment was Provident Fund (PPF/EPF/VPF).
Why?
The contributions were (and is) eligible for deduction.
The returns were decent (12% till the year 2000 – imagine that 🙂 ).
And even the maturity amount is tax-free!
What else do you want in this world? 😉
But let us for a moment think about one thing:
PPF account has a maturity period of 15 years. So it is ideally created for goals that are atleast 15 years away.
Now due to the risk-free nature of the product, the returns given by PPF would ideally be less than those given by riskier assets. Isn’t it?
Also, you and I understand that when investing for long-term goals, we can and should invest more in assets that give higher returns in spite of being volatile?
Why? Because average returns are higher when longer periods are considered.
So if we are investing for goals that are due in long-term (i.e. 15 years) like say retirement, etc., shouldn’t we be investing in an asset that gives better returns?
I think we should. If not fully then atleast a major chunk of our investments. Short-term volatility should not be an excuse for avoiding an asset, which gives higher long-term returns.
But if you and I are able to stomach some of these short-term fluctuations, then we should have a higher exposure to equity as it provides higher long-term returns – which is necessary to build a healthy corpus. And also because in the long run, equity has a better potential of beating inflation and creating wealth.
I know when the topic of PPF comes up, it also brings up the topic of tax savings. And with that, comes the PPF vs ELSS debate and questions like whether to invest in PPF or ELSS or both? But that is a detailed discussion in itself. So let’s leave it for some other day.
I personally invest a lot more in equity MFs, direct equities than in PPF. So you can take that as a disclosure. 🙂
PPF (or EPF) should definitely be a part of your portfolio and you are right in regularly keeping track of PPF interest rates. 🙂 But investments should be made as per the goal requirements, the suitability of asset allocation and not just because of tax considerations.
By investing Rs 1 lac in October every year in Nifty50 for the past 20 years, the value of investments would have become Rs 94 lac. Not bad again.
