Last Updated on April 1, 2022 at 10:35 am
Many PPF investors 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 this! The discussion also applies if you wish to maximise PPF investments over the course of the financial year.
If you invest Rs. 1.5 lakh within the first five days of April, the entire Rs. 1.5 lakh (plus existing balance) would receive interest for the full financial year. This rule and this discussion also apply to Sukanya Samriddhi Yojana.
The interest paid would be lower if investments are made in a staggered manner. However, the difference is relatively small even without considering the impact of inflation over 15 years: Investing in PPF before 5th vs investing after 5th. Also, see Sukanya Samriddhi Yojana vs PPF: An Illustration.
The problem with maximising investments in PPF or SSY is it could destroy all chances of beating inflation. That is, our savings in these will grow for sure, but our future expenses would grow at a faster rate. This means too much-fixed income in the portfolio. We would be participating in a race where the result is known beforehand: guaranteed failure.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
Already interest rates for both instruments have come down considerably. Even if it goes up for a few years in the immediate future, it would be pretty unreasonable to expect 8% returns from these over the next decade or more. Also, see: Worried about low PPF interest rate? Here is why it could drop further
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 needs to invest per year would be a lot more.
So the only chance of beating inflation is to have a portfolio of 50-60% equity. If one can pull this off and still have Rs. 1.5 lakh 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 themselves from 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.
A simple thumb rule for retirement is, if X = annual expenses that will persist all your life (this includes needs and want but not EMIs or school fees), then X should 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 will need to look beyond the tax-free comfort of high returns from PPF, which is not sufficient 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 that is 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 initially invest less in PPF (and more into 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, they would lose more time in 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 FY 2021-2022.
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.
Additional PPF resources
- Should I close my PPF account after maturity or extend it?
- Ten lesser-known facts about PPF accounts!
- Why PPF is excluded from the new rule on taxable PF interest.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 7000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 2,500 investors and advisors use this!
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 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
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)