Having a tax-free status and being practically risk-free, the PPF continues to be a wonderful debt product
You already know that the rates on the PPF (public provident fund) were cut sharply a few weeks back – from 7.9 per cent to 7.1 per cent. This is the sharpest cut in the recent past.
This cut has many people questioning the relevance of PPF investments. Of course, it has seen glory days of 12 per cent in the past. But I think people should compare PPF interest rates with the returns offered by comparable debt investments today. We need to accept the simple fact that you cannot keep getting freebies from the government.
Interest rate on the PPF has been declining over the last few years, in line with fall in rates across the economy. And as many of you know, the PPF rates are ‘ideally to remain’ aligned to government security yields on a quarterly basis. So, with yields in the 6-6.5 per cent range, the government had been benevolent in not cutting rates substantially till now and had kept them artificially high. It is only this time that it has finally decided to bite the bullet and bring it down to 7.1 per cent.
Still, having the tax-free EEE status and, more importantly, being practically risk-free, the PPF continues to remain a wonderful debt product. But it should not be invested in blindly by taking random financial advice, or, only for tax saving. It should align with your goals and fit into your goal-based investment plans.
And to be really fair, despite the steep rate cut this time, most common investors are unlikely to find better paying debt instruments without taking unnecessary risks. Something that got highlighted quiet clearly in the on-going virus-triggered liquidity crunches faced by risky debt funds. And at least in the near term and due to the on-going health-cum-economic crisis, you are unlikely to find reliable alternatives that give better rates.
When investing in debt, liquidity should also be a factor in consideration. But it is common knowledge that PPF has a lock-in of 15 years and, hence, is suitable for long term goals. More specifically, it is useful for your retirement. But it must never be your only retirement savings avenue.
Other options too must be considered
Most people (unless they are ultra-conservative savers) need some equity in their retirement savings to achieve better and sustained inflation-beating returns in the long run. Else, they will be unable to accumulate a reasonably large retirement kitty.
Also, most salaried individuals have their on-going EPF savings. So does it mean that they don’t need the PPF?
Here is how one can go about thinking this through.
-First, figure out when you will (or want to) retire and how much your expenses during retirement is likely to be.
-Then find out how much you need to retire (corpus size) in your chosen timelines.
-Next, figure out a suitable asset allocation given your risk appetite (profile) and timelines.
-Then calculate how much you need to invest regularly (after accommodating your existing savings in the calculations as well). Using the asset allocation devised earlier, you would know how much to invest in equity and debt every month.
-Now, if debt-savings requirements are already met using your EPF contribution (and your employer’s), then you don’t need to invest more in debt instruments. If it’s not met, you should first try to increase your provident contributions using VPF as it offers slightly higher rates than the PPF. If that option isn’t available (or if you don’t have EPF being self-employed), then you can consider PPF. The equity requirements can be met via SIP in equity funds.
I know that many common people get ill advised or are plain greedy and try to be adventurous with their debt investments to earn 1-2 per cent more. But this approach is best avoided. Debt is not the place to be a cowboy. For long-term goals and for most savers, risk-free instruments such as EPF and PPF are ideal.
As of now, the PPF, even with its current rates continues to remain attractive from a long-term perspective.
(The writer is the founder of StableInvestor.com)