Investors typically focus on the tax-free, risk-free, and tax-saving benefits of PPF. Even those who cannot afford it often scrounge for Rs. 1.5 lakh for PPF investment within the first five days of the financial year. See: Investing Rs. 1.5 lakhs in PPF before April 5th may not be healthy for your portfolio!
An under-appreciated feature of PPF allows it to be a portfolio de-risking tool. Portfolio de-risking refers to the gradual reduction of equity allocation goal-based before the goal deadline.
While most people believe that investing the maximum amount possible by April 5th or before the 5th of every month is the way to maximize the maturity value of PPF, this is not the ultimate goal of investing.
PPF is unlikely to beat inflation despite its tax-free nature – not because of gradually falling interest rates but because of the maximum investment limit. An investor cannot say, “I am scared of capital markets. I want 100% safety”, and throw money at the problem.
One cannot invest lakhs into PPF each year in the name of safety. This is the key reason asset allocation matters and equity exposure becomes mandatory. It may be tax-free and risk-free, but too much of it will ensure we never change our social station. The same argument applies to those who invest in VPF.
🔥Secure your future with our Robo-advisory tool trusted by over 3,500 investors and advisors. From effortless retirement planning to funding your children’s biggest dreams, turn your financial goals into reality. 🔥
Subscribe for money management solutions via email! (Link takes you to our email sign-up form) Join 32,000+ readers in our community.
👉 New Tool Alert! NaviPlan: A Privacy-Focused Multi-asset Tracker and Goal Planner 👈
I could start a PPF account, invest Rs. 500 for the first 14 years, and invest Rs. 1.5L in the 15th year. This flexibility is rare and not often exploited. A fixed deposit, recurring deposit, or an insurance premium does not have this. If the term of investment is fixed, the amount is also fixed – lump sum or recurring.
How is this a benefit when you are investing less than you can? This is where proper goal-based investing and asset allocation come in. Suppose you start investing after appreciating inflation and asset allocation. You maintain a 50% equity portfolio and 50% fixed income, most of which are in EPF, NPS, or a gilt fund. See: Can we invest via SIP in gilt mutual funds for the long term?
You add a PPF account and keep it alive. The retirement goal progress is monitored yearly, and the corpus is “evaluated” yearly. See: Review Your Financial Freedom Portfolio in Seven Easy Steps. After a few years of investing and regular rebalancing, you are ready to start reducing the equity allocation.
You decide to reduce equity allocation and lock away the gains in a “safe place”. PPF is a natural choice to do this. You can invest Rs. 1.5L in your account. If your spouse also has a PPF account, the amount will increase to Rs 3L.
This is only possible if you do not rush to max your PPF accounts yearly.
Using PPF as a safe house for equity gains gives you enormous psychological benefits: “I made my money work hard, I took a big risk, and now the reward is safe”. Note that this has to be done from the point of view of the goal and not randomly, not each time there is a good equity year.
There are some limitations to this approach. This can only be used for one-way rebalancing. That is, from equity to debt. Since the PPF is only partially liquid (after seven years), the money invested from equity to PPF will likely be there until redemption. So, this works well for portfolio de-risking.
It may also work for one-way equity-to-debt rebalancing when there is a large amount to be shifted. Some of it goes to PPF, and a majority chunk goes to other liquid debt instruments.
As freefincal regulars may be well aware, I have used this idea to minimise risk from my son’s future goals portfolio. I started investing in Dec 2009 (a month before he was born). I had done enough goal-based investing calculators by this time to appreciate inflation and asset allocation.
So, the equity allocation for this goal (unlike retirement) was 60%-ish from day one. Thrice in the last 14+ years, I have maximised my son’s PPF account only by redeeming from equity. This is possible because of the right asset allocation -no PPF account is maxed.
This way, although the asset allocation is about 60% equity and 40% fixed income, the latter has enough to handle a UG education at today’s costs comfortably. This allows me to take on the risk of poor equity returns with peace of mind.
Please note I am referring to goal-based portfolio de-risking here and not rebalancing. Although a PPF is partially liquid after seven years, a gilt fund is better suited for the annual rebalancing of a long-term portfolio. This “shifting gains to PPF” is meaningful only if you track the goal corpus growth and you are aware of “where you are” at any time. You can review your goal-based investment portfolio with this auditing tool.
We must think beyond maximising tax-free “safe” investments and focus on our goals. PPF allows us to do this if we have the right priorities.