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.
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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.
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