Last Updated on April 1, 2021 at 9:03 am
PPF interest rate has been “slashed” from 7.1% to 6.4% for the second quarter of 2021. This has come as a big shock to retail investors who, at the least, expected rates to remain the same. The rate for Sukanya Samridhhi Yojana has also be reduced from 7.6% to 6.9%. Does it still make sense to invest in PPF and SSY?
Update: Govt has reversed the rate cut but the arguments made here remain unchanged.
Historical rates of PPF and SSY can be found here: PPF Interest Rate History 1968 to Present and Sukanya Samriddhi Yojana Interest Rate History 2015 to Present
As usual investment decisions cannot be made on the basis of rates alone. It depends on multiple factors, but here is a crude classification. Here I am referring to investors heavily dependent on PPF or EPF or VPF or SSY. Yes, it is only a matter of time before EPF/VPF rates go down. We have already explained why it is a mistake to maximise PPF investments: Want to invest Rs. 1.5 Lakh in PPF this April? Don’t be in a hurry!
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Less than 35 years of age: Use this as a wake-up call to first increase equity exposure in your portfolios. At least 40-50% equity is necessary. You can build this by investing less in PPF/VPF. Once this is done, you can also consider including exposure to long-term gilt mutual funds. They come with their own bag of risks but stand a good chance to outperform PPF. See; PPF vs Gilt mutual funds: Which has done better over 15 years? You can increase investments in gilt funds in future.
35-40 years of age: You have one last chance to implement the above suggestion, but the time available to get used to market risks is too short. So get professional help from a SEBI registered fee-only planner immediately. You will have to bite the bullet, reduced or even stop investments in PPF (other than the min reqd) and do this. Otherwise, you are looking at a guaranteed failure to beat inflation after inflation.
For older investors, particularly corporate employees retirement would be around the corner. If they have a debt-heavy portfolio, they have no choice but to continue investing as much as possible in EPF and PPF. It would be better if such individuals seriously start considering additional income sources from their skillsets. Without equity, only higher-income can beat inflation.
Should I use NPS instead of PPF? Please do not! NPS comes with harsh liquidity conditions (80% locked into a pension plan for exits before 60). You can get the same benefits (and risks) of NPS with a gilt fund.
Should I buy endowment policies instead of PPF? That would be jumping from the frying pan into the fire. The guaranteed to not beat inflation tag will still remain.
Will PPF rates keep falling? No. They could and probably will go back up in the near future, but over the long term, the rate has to fall and will fall. This is the sad reality of not participating in market risk. By only contributing as a consumer in the “Indian growth” story and not as an investor.
To summarise, older investors should continue investing in PPF but must look for alternative income sources with their skills. They should not consider debt with higher rates or hybrid mutul funds. The consequences of doing so without capital market experience can be disastrous.
For younger investors, this is a wake-up call. Answer it; embrace market risk to stand a chance against inflation