Young Earners: Do not invest Rs. 1.5 Lakh in PPF!

In the previous post in the ‘young earner’ series, I had listed down a set of personal finance essentials. Two points appear to have caught the eye of many readers.

  1. Do not open a PPF account
  2. Do not start a SIP in an ELSS fund

In this post I would like to expound on the first point. But first, a quick look at the second.

Do not start a SIP in an ELSS fund because each instalment will be lock-in for 3 years. Instead, open an account with an AMC, and invest every few months, on market dips, if possible.

This way, you get used to market volatility (train yourself to invest on dips), take control of your investments and make manual investing a habit.

Initially, the tax-saving serves as a carrot.  Soon it will not be necessary. You will be control.

Let us now talk about PPF.

When I wrote, ‘Do not open a PPF account, I listed it against activity zero.

I meant a PPF account is not a prerequisite for investing.

  • There is no hurry to open one.
  • There is no need to include it as part of 80C deductions
  • There is no need to invest to maximize investment in it.

Most people make the mistake of taking the benefits of a PPF account too seriously.

  • 80C deduction
  • EEE- taxation  (investments, interest income  and maturity amount are tax-free)
  • Safety
  • Rs. 1.5 L  invested each year for 15 years gets you 43.5L lakh at a constant 8% interest

All these are great features, but are they relevant for your financial goals?

A PPF account is suitable only for a goal which 15 full financial years away.

If we want to maximize the corpus for such a goal, we need at least 60-70% exposure to equity investments for such a goal.

Therefore, by focussing on ‘maxing’ our PPF account, it quite likely that we are not investing enough in equity.

When it comes to equity investing, time in the market maybe more important than timing the market, but

Time in the market implies capital in the market

That is, unless you maximize your invest in equity, time in the market is of no use.

Investing Rs. 1.5 lakh per year in PPF and starting a SIP for Rs. 2000 will most likely get you nowhere.

  • If you need to invest Rs. 10,000 each month for a financial goal, 15 years away, invest about Rs. 3,000 in PPF and the rest in equity.
  • If the goal is 20-25 years away (say, your retirement), invest only about Rs. 500/1000 (or less!) each month to PPF. Put the rest in equity. Remember your EPF (NPS in my case) will serve as the debt component.

In both cases, if your equity holdings increase in value sharply due a market surge, you can shift some gains from equity to PPF. This is referred to as one-way ‘rebalancing’

This is not possible if you are in the habit of investing Rs. 1 lakh (now 1.5 lakh) each April.

Rebalancing is a method by which you reset your asset allocation. If you started with 70:30, equity:debt ratio and after a year it is 75:25, rebalancing is the process by which you reset the allocation back to 70:30. If after a year it is 65:35, you again reset to 70:30. Learn more about it here.

It allows you to shift the fruit of compounding to safer instruments, increase capital in the under-performing asset (in the hope that it will pick up soon!). You can check out the rebalancing simulators at freefincal.

If you use PPF for your debt portfolio, you can shift from equity to PPF. You cannot shift from PPF to equity.

This is not a serious disadvantage but one-way rebalancing is way less optimal than two-way rebalancing.

A debt fund instead of a PPF could do a better job.

In fact, with a volatile debt fund like a long-term gilt fund, it is possible to shift gains (when interest rates fall) to equity.

To summarize,

  • Use ELSS, term insurance premium and your EPF contributions for tax saving under 80C.
  • Open a PPF account with a financial goal in mind. Not because it eligible for 80C deductions or for investing Rs. 1.5 lakh each year to get tax-free returns.
  • Find out how much you need to invest for the goal, determine the equity:debt asset allocation and stick to it.
  • Never withdraw from your equity holdings or PPF unless you really have to. The whole idea behind financial planning is to avoid such withdrawals. So ensure your personal finance essentials are taken care of. The same applies to a loan against PPF.

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44 thoughts on “Young Earners: Do not invest Rs. 1.5 Lakh in PPF!

  1. Parag

    Investors employed in the unorganized sectors (service/business), not having EPF/NPS should treat PPF as a partial debt component of their portfolio.

    Reply
  2. Parag

    Investors employed in the unorganized sectors (service/business), not having EPF/NPS should treat PPF as a partial debt component of their portfolio.

    Reply
  3. Shiv Kumar

    eye opener!!.. thanks pattu sir.. i will start understanding all your calculators and play with numbers.. next is to open accounts with AMC for investing in direct funds.. U r doing great job..

    Reply
  4. Shiv Kumar

    eye opener!!.. thanks pattu sir.. i will start understanding all your calculators and play with numbers.. next is to open accounts with AMC for investing in direct funds.. U r doing great job..

    Reply
  5. Prakash Praharaj

    Good one !But if we invest in Debt Fund instead of PPF,there are risk of (1)capital gain taxation (2)Interest rate risk(Yield will reduce over a period with reduction in inflation).

    Reply
  6. Prakash Praharaj

    Good one !But if we invest in Debt Fund instead of PPF,there are risk of (1)capital gain taxation (2)Interest rate risk(Yield will reduce over a period with reduction in inflation).

    Reply
  7. Prakash Praharaj

    Good one !But if we invest in Debt Fund instead of PPF,there are risk of (1)capital gain taxation (2)Interest rate risk(Yield will reduce over a period with reduction in inflation).

    Reply
  8. Pattabiraman Murari

    Yes I agree. However, if all the units are not redeemed at the same time, like for instance in retirement, then the tax will reduce considerably. Interest risk is higher in debt funds, but it is also present in PPF. With effective rebalancing, the gains in a debt fund when rates fall, can be invested in equity. So the portfolio could do well if one can weather the storm with a long-term gilt fund.

    Reply
  9. Pattabiraman Murari

    Yes I agree. However, if all the units are not redeemed at the same time, like for instance in retirement, then the tax will reduce considerably. Interest risk is higher in debt funds, but it is also present in PPF. With effective rebalancing, the gains in a debt fund when rates fall, can be invested in equity. So the portfolio could do well if one can weather the storm with a long-term gilt fund.

    Reply
  10. Ritesh

    i really dont know wat r assumptions behind saying not to invest in PPF..... hence i choose not to agree with this article and will invest entire amount within 5th day of the month it gets notified.
    I am 34 years - 80% direct equity - portfolio growing at 18-19% CAGR for last 8 years and 20% debt - where PPF is first priority. 70% of income is saved.

    Reply
    1. pattu

      1. I am not addressing 34 year olds with 8 years of investing experience and that too in direct equity.
      2. I am addressing all those who neglect equity investing and think investing the max amount in PPF is a wonderful wealth creation opportunity.

      Reply
  11. Ritesh

    i really dont know wat r assumptions behind saying not to invest in PPF..... hence i choose not to agree with this article and will invest entire amount within 5th day of the month it gets notified.
    I am 34 years - 80% direct equity - portfolio growing at 18-19% CAGR for last 8 years and 20% debt - where PPF is first priority. 70% of income is saved.

    Reply
    1. pattu

      1. I am not addressing 34 year olds with 8 years of investing experience and that too in direct equity.
      2. I am addressing all those who neglect equity investing and think investing the max amount in PPF is a wonderful wealth creation opportunity.

      Reply
  12. Akshay

    Thanks a lot for your inputs, your blog is very helpful for armatures like myself
    I am 22 years old,
    I have just started a job and investing for future.
    I get in hand approximately 35,000 Rs
    I have a SIP for 3 mutual funds - so a total of 15,000 per month is allocated there
    I deposit 12,000 every month in PPF. (To achieve target 1,50,000)
    5,000 per month is invested in equity.
    the rest 3,000 is for my expenses or liquid cash flow
    [ I have minimal expenditure as am living with parents ]

    Kindly advice on any changes i need to make in my investment as i am trying to plan for my future

    I have already downloaded your retirement calculator and tried to get help from same.

    Reply
  13. Akshay

    Thanks a lot for your inputs, your blog is very helpful for armatures like myself
    I am 22 years old,
    I have just started a job and investing for future.
    I get in hand approximately 35,000 Rs
    I have a SIP for 3 mutual funds - so a total of 15,000 per month is allocated there
    I deposit 12,000 every month in PPF. (To achieve target 1,50,000)
    5,000 per month is invested in equity.
    the rest 3,000 is for my expenses or liquid cash flow
    [ I have minimal expenditure as am living with parents ]

    Kindly advice on any changes i need to make in my investment as i am trying to plan for my future

    I have already downloaded your retirement calculator and tried to get help from same.

    Reply
  14. Arvind

    First of all...PPF rates rt now is 8.7 %..so it is gone yeald 46.7L after 15 years.
    As a young invester...I will strongly encourage guys to open PPF account and start investing full.
    Begin a strong carrier orriented guy..I believe all others are as well.....I hardly used to get time to invest when market is low.....I have already lost 1L rupees in market.....so guys I will strongly says...if u have time and knowledge then only go for equity....pl pl do not rely on your demat account holders tips...u will loose money.....I am not discouraging you all guys to stay away from market..I am only saying if u have full knowledge. .then andthen only invest in equity.

    Reply
    1. pattu

      While you are entitled to you own opinion about PPF, let me just point out that for people like me who don't know anything about stocks, there are mutual funds.

      Reply
  15. Arvind

    First of all...PPF rates rt now is 8.7 %..so it is gone yeald 46.7L after 15 years.
    As a young invester...I will strongly encourage guys to open PPF account and start investing full.
    Begin a strong carrier orriented guy..I believe all others are as well.....I hardly used to get time to invest when market is low.....I have already lost 1L rupees in market.....so guys I will strongly says...if u have time and knowledge then only go for equity....pl pl do not rely on your demat account holders tips...u will loose money.....I am not discouraging you all guys to stay away from market..I am only saying if u have full knowledge. .then andthen only invest in equity.

    Reply
    1. pattu

      While you are entitled to you own opinion about PPF, let me just point out that for people like me who don't know anything about stocks, there are mutual funds.

      Reply
  16. v k wills

    I stumbled on this blog recently. A treasure trove of information and calculators! I am wondering if there is any formula to calculate the growth of a stock portfolio if it grows/compounds at 12% (16% - very optimistic) for 20 years. Please let me know.

    Reply
    1. pattu

      Hi, Thank you. Yes growth of a stock portfolio can be easily determined. Dividends will have to be assumed to reinvested though. This can be done with a XIRR calculator. I have one. You can use that.

      Reply
  17. v k wills

    I stumbled on this blog recently. A treasure trove of information and calculators! I am wondering if there is any formula to calculate the growth of a stock portfolio if it grows/compounds at 12% (16% - very optimistic) for 20 years. Please let me know.

    Reply
    1. pattu

      Hi, Thank you. Yes growth of a stock portfolio can be easily determined. Dividends will have to be assumed to reinvested though. This can be done with a XIRR calculator. I have one. You can use that.

      Reply
  18. Vishal Rochlani

    ELSS should be first option due to the benefit of Equity Exposure. Investing in SIP is the best option, as some of the Investors will not do it on regular basis and the amount might be invested somewhere else. For Discipline SIP is must. PPF should be for the Debt Option. The Interest is on Cumulative basis, i.e. Int. on Int. so the % of Interest will be much higher somewhere around 10% and more. Some ELSS have given returns of more then 25% since the last 15 years, so I am for it and also in future also the same is going to be good.

    Reply
  19. Vishal Rochlani

    ELSS should be first option due to the benefit of Equity Exposure. Investing in SIP is the best option, as some of the Investors will not do it on regular basis and the amount might be invested somewhere else. For Discipline SIP is must. PPF should be for the Debt Option. The Interest is on Cumulative basis, i.e. Int. on Int. so the % of Interest will be much higher somewhere around 10% and more. Some ELSS have given returns of more then 25% since the last 15 years, so I am for it and also in future also the same is going to be good.

    Reply
  20. rakesh

    I may be wrong but i feel PPF/FD is one of the best advise for young earners, until they understand a little about personal finance and saving. I have just passed that bracket of 30, and seldom have i seen young people worried about investing, Either they spend there money in illogical share trading(may be future learning can be taken from here), or just keep the money lying around in bank a/c's. If they do FD/PPF at least there money will grow

    Reply
    1. pattu

      We cannot generalize such behaviour to every young earner. The idea is to offer clinical and mathematically logic advice. I will not play psychologist and assume what is best for others.

      Reply
  21. rakesh

    I may be wrong but i feel PPF/FD is one of the best advise for young earners, until they understand a little about personal finance and saving. I have just passed that bracket of 30, and seldom have i seen young people worried about investing, Either they spend there money in illogical share trading(may be future learning can be taken from here), or just keep the money lying around in bank a/c's. If they do FD/PPF at least there money will grow

    Reply
  22. piyush

    I have a doubt related to comment where you suggest to not to invest in ELSS SIP. "Do not start a SIP in an ELSS fund because each instalment will be lock-in for 3 years. Instead, open an account with an AMC, and invest every few months, on market dips, if possible."

    Aren't lumpsum ELSS fund investment have lock-in period of 3 years exactly like ELSS SIP? I think this paragraph needs to be explained in more details, because the first sentence says ELSS has 3 years lock-in period and next sentence tries to contradict by using word, "instead". So for an amateur investor it may mean that ELSS lumpsum do not have a lock-in period of 3 years.

    Thanks for great advice, by the way. I read this blog quite often 🙂

    Reply
  23. shivala shrwan kumar

    Sir
    Now I m in 32 year of age. And working in railways from one year.my approx salary is 20-25k. In railway there is NPS. Recently I have opend a ppf a/c and going to invest in PLI..
    NOW Plz suggest me in ppf a/c how much I have to invest per year. In PLI What amount of insurance I should take and what are the other areas there I should invest for better wealth and future...waiting for ur rply..

    Reply
  24. Bubai

    Hi,
    I am just joined in job and now 34 years. 10 thousand I can invest per month.
    Also I check your RET calculator and as per my convenience I invest max 10 thousand Per year.

    I Check your different blogs and My Plan is to invest

    70% in MF and 30 % in PPF (3000/~)

    What will be allocation for 70%

    Large cap
    Or
    Large + Mid cap
    Or
    balance Fund

    5000+ 2000
    or
    4000+3000

    Thank you,
    shankha

    Reply

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