Last Updated on April 3, 2022 at 8:49 am
When it comes to the public provident fund (PPF), investors tend to focus on its risk-free, tax-free and tax-saving benefits. In fact, even those who cannot afford to do so, scour around to find Rs. 1.5 lakh for PPF investment within the first five days of the financial year (which incidentally could be a mistake!). There is an under-appreciated feature of PPF that hides in plain sight which is perfect for goal-based investing.
Ask anyone how to use a PPF account, they would tell you, (1) invest the maximum amount possible each financial year; (2) do so either by April 5th or before the 5th of every month. Yes, this is the way the maximise the maturity value of PPF, but that is not the goal of investing! There is a third, important way to benefit from PPF.
In spite of its tax-free nature, PPF is unlikely to beat inflation – 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.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! 🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
That is, one cannot invest lakhs into PPF each year in the name of safety. This is the key reason why asset allocation matters, why equity exposure becomes mandatory. It may be tax-free and apparently risk-free, but too much of it will ensure we never change our social station in life.
As we saw recently – Why Benjamin Graham’s 50% Stocks 50% Bonds strategy works! – a 15- year goal ( or longer, why else would you use PPF?) requires at least 50% in equity and 50% in fixed income.
So what is this third way? No, it is not asset allocation. We have talked about that enough! The third way is this well known PPF rule: the minimum investment is Rs. 500 a financial year! How this is a benefit you might ask.
I could start a PPF account, invest Rs. 500 for the first 14 years, invest Rs. 1.5L in the 15th year. This flexibility is rare and not often exploited. A fixed deposit or 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 actually investing lesser than you can? This is where proper goal-based investing and asset allocation comes in. Suppose you start investing after appreciating inflation and asset allocation. You maintain a 50% equity portfolio and 50% fixed income most of which is in EPF or NPS or a gilt fund. See: Can we invest via SIP in gilt mutual funds for the long term?
You add a PPF account, but just keep it alive. The retirement goal progress is monitored each year and the corpus “evaluated” each year. See: Review Your Financial Freedom Portfolio in Seven Easy Steps. After a few years of investing and regular rebalancing, the equity portfolio sees an excellent year with 90% annual gains.
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 say your account and another Rs. 1.5L in your spouse’s account. Income clubbing rules would apply, but since PPF is tax-free it is only a matter of appropriate reporting in ITR. This is only possible if you do not rush to max your PPF accounts each year.
By using PPF as a safehouse for equity gains, you gain enormous psychological benefit: “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.
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). By this time, I had done enough goal-based investing calculators to appreciate inflation and asset allocation.
So the equity allocation for this goal (unlike retirement) was 60%-ish from day one. Twice in the last 10+ years, I have maximised my son’s PPF account only by redeeming from equity. This is possible because the right asset allocation -no PPF account is maxed. My mothers PPF account is also tagged to this goal and was started only for this purpose. The two PPF accounts + an arbitrage fund (also created from booked profits) maintain fixed income allocation.
This way, although the asset allocation is still 60% equity, 40% fixed income, the latter has enough to handle a UG education comfortably in today’s costs (my son is 10 with 8 years to college). 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 are aware of “where you are” at any point in time.
We need to step away from the mindset of maximising security each year to maximising security when it matters the most. PPF allows us to do this if we have the right priorities.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)