Thinking of investing Rs. 1.5 Lakh in PPF this April? Don’t be in a hurry!

Now that the finance ministry has clarified that FY 2020-2021 will start from 1st April 2020, investors who wish to kick off their tax-saving exercise for the new FY can do so. In particular many have a habit of investing Rs. 1.5 Lakh between April 1st to April 5th to “maximise” the interest benefits of PPF. Here is what you need to consider before you do so this time (every time)

Investors who have not yet exhausted their 80C investments for FY 2019-2020 have been given until June 30th 2020 to so do. They will have to account for such transactions made bet April to June 2020 appropriately while filing for ITR. That is, they will have to either club those transactions as done in FY 2019-2020 or FY 2020-2021 making sure there is no double entry.

The reason why investors (who can afford to) invest the maximum amount within the first five days of April is well known. The entire Rs. 1.5 lakh (plus existing balance) would receive interest for the full financial year. This is also true for Sukanya Samriddhi Yojana. If the money was staggered then the amount of interest would be lower. We have already shown that over 15Y, considering inflation and the need to have substantial equity, when you invest in PPF does not matter much: Investing Before 5th vs. Investing After 5th. Also see: Sukanya Samriddhi Yojana vs PPF: An Illustration

Since PPF has a 15-year tenure (extendable in blocks of 5 years for life) the only two life goals it can be used for is retirement and children’s education (if started early enough and better than SSY for girls).

For such goals, significant equity exposure is mandatory since most investors cannot afford to invest the amount necessary with 100% PPF/EPF exposure and still attain their goals. See why: Can I Plan My Retirement With Recurring Deposits and Fixed Deposits?

At least 60% in equity for at least a few years would be necessary to stand a fighting chance against inflation. If investors rush to put in Rs. 1.5 lakh in PPF during the first five days of April each year, the asset allocation to equity would decrease.

For many, it was not significant, to begin with. The sustained maximum investment in PPF can only make this worse. Investors will need to look beyond the tax-free comfort of high returns from PPF which is not sufficient for financial freedom after retirement.

Only those who can afford to keep total fixed income exposure (PPF + EPF + FDs etc) to about 40-50% of the portfolio with rest in stocks can and should max out PPF each FY. Failure to do so can prove costly in the long run.

FY 2020-2021 is especially a good year to invest in equity after the market crash. So any amount earmarked for PPF can be invested into equity if your portfolio has the necessary room for it. So do consider your asset allocation and your financial goals before rushing to invest Rs 1.5 lakh in the first days of the new financial year.

My strategy: I use PPF for retirement (mine and my wife’s) and my son’s education goals (minor PPF + PPF acct of my mother). All PPF accounts are more than 10 years old and none of them ever saw fresh investments of Rs. 1.5 lakh because it was not suitable for the asset allocation I had in mind.

I have thrice rebalanced from my equity mutual funds (tagged to my son’s portfolio) into PPF. This is how I was able to build a corpus equal to the current cost of UG education in the PPF accounts. This helped me stay calm during the crash.

The right asset allocation is the key to successful investing. Not tax-saving, tax-free guaranteed returns. Investments that look secure and comforting now may come and hurt you hard.