Many investors rush to invest Rs. 1.5 Lakh between April 1st and April 5th or as early as possible in the financial year to “maximize” the interest advantages of PPF. Is this wise? What are the factors to consider?
If you invest Rs. 1.5 lakh during the initial five days of April, the entire amount of Rs. 1.5 lakh (along with the existing balance) will earn interest for the entire fiscal year. This principle and discussion are also applicable to the Sukanya Samriddhi Yojana scheme.
If investments are made in a staggered manner, the interest paid would be reduced. Nonetheless, the discrepancy is relatively minor, even without considering the effects of inflation over a 15-year period: investing in a PPF before the 5th versus investing after the 5th. It is also worth comparing the Sukanya Samriddhi Yojana and PPF through an illustration.
Maximizing investments in PPF or SSY eliminates any opportunity to outpace inflation if fixed income is a dominant component in our long term portfolios. While our savings in these instruments will undoubtedly increase, our future expenses will likely grow faster. It is as if we are entering a race where the outcome is predetermined: assured failure.
Already, interest rates for both instruments have come down considerably. Even if it goes up for a few years in the immediate future, expecting 8% returns from these over the next decade or more would be pretty unreasonable. Also, see: Worried about low PPF interest rate? Here is why it could drop further
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Even if one does get 8% from PPF, which is a reasonably good inflation estimate, we will still not get zero real return from the corpus. This is because the maximum investment limit is only Rs. 1.5 lakh and the amount anyone reading this must invest yearly would be much more.
So, the only chance of beating inflation is having a 50-60% equity portfolio if the goal is 10+ years away, at least initially. If one can pull this off and still have Rs. 1.5 lakh left to invest in PPF, it is ‘okay’. The sad reality is most people who have crossed 30 have debt-heavy portfolios. Despite this, they cannot stop maximising PPF each financial year. The lure of an EEE* instrument is hard to resist, and very few investors realise the consequences of their actions.
* Technically, in the new tax regime, PPF is only TEE (taxable, exempt, exempt)
A simple thumb rule for retirement is, if X = annual expenses that will persist all your life (this includes needs and wants but not EMIs or school fees), then X should be the minimum amount you invest for retirement. And we should increase this X investment by at least 10% each year.
The investment should be in an initial asset allocation of 50-70% equity decreasing systematically, and we should plan this variable asset allocation from day one. See Basics of portfolio construction: A guide for beginners.
Rushing to invest Rs. 1.5 lakh within the first five days of April (or over the course of the financial year) would, for most investors, reduce all chances of getting the necessary equity allocation
Investors must look beyond the tax-free comfort of high returns from PPF, which is insufficient for financial freedom after retirement. This does not mean there is no place for PPF in retirement or a child’s future portfolio.
PPF (& SSY) have an excellent feature not exploited enough: you can invest Rs. Five hundred in one FY and Rs. 1.5 lakh in another. We can use this to secure the gains from equity via rebalancing from time to time. See: This helpful feature of PPF deserves more attention!
The same benefit allows us to invest less in PPF (and more in equity) and gradually increase the PPF investment to reduce portfolio risk. See: Why I maximised PPF investment only after ten years.
The longer investors keep maximising PPF, the more they will lose time getting used to equity volatility. Beyond a point, it would become a risk to redeem from PPF or other forms for fixed income and invest in equity: Should I withdraw from PPF and invest in equity MF to reach my asset allocation goal?
Therefore, we recommend investors take a closer look at their goals, decide on an asset allocation and do their best to align their portfolio towards that asset allocation without rushing to invest Rs. 1.5 lakh in the first few days of April or throughout the financial year.
Proper asset allocation is the key to successful investing. Not tax-saving*, not tax-free guaranteed returns. Investments that look secure and comforting now may come and hurt you hard later in life. * In any case, tax saving is dead now, thanks to the new tax regime.
Additional PPF resources
- Should I close my PPF account after maturity or extend it?
- Ten lesser-known facts about PPF accounts!
- Why is the PPF excluded from the new rule on taxable PF interest?