Does rushing to invest in PPF before April 5 make sense?

Every April, many investors eagerly deposit funds into their Public Provident Fund (PPF) accounts before April 5, hoping to capitalise on the additional interest accrued from early investment. Indeed, depositing a lumpsum between April 1 and April 5 annually in a PPF account, assuming a consistent interest rate of 7.1%, yields a substantial maturity amount compared to monthly deposits of ₹12,500 over the subsequent 15 years. With monthly investments of ₹12,500 in a PPF account for 15 years at a constant interest rate of 7.1%, the total amount earned is ₹40,20,301. In comparison, depositing ₹1,50,000 into your PPF account by April 5 each year will result in a maturity amount of ₹40,68,209.22 after 15 years. The difference in yields is approximately ₹38,000. While some may argue that “a rupee saved is a rupee earned and vice versa,” others may disagree with this perspective.

However, despite the risk-free nature of this investment and the associated tax benefits, is it truly beneficial to rush and deposit money into a PPF account at the start of each month? This question warrants reflection, especially when considering how inflation significantly erodes your savings and investments at a rate much faster than what fixed-income investments can generate over time.

Does your PPF investment help meet your financial goals?

There is a lot of goodwill surrounding PPF investments. However, investors should question whether the frenetic rush to open a PPF account and gather funds for investment before April 5 each year is truly worthwhile. More importantly, are their PPF investments aligned with their financial goals, or did they invest based on hearsay or the cordiality that bankers show to their prospective customers (cum investors)?

Let’s clarify this with an example. While a PPF investment typically spans 15 years, the government does permit premature withdrawal under specific conditions. However, what if your investment horizon is only 10 years, and you wish to receive the maturity amount at that time? If your financial goal is for 10 years but your PPF matures in 15 years, then what purpose does the PPF serve?

Firstly, clearly define your financial objectives and determine if the maturity period of PPF aligns with your financial needs. Otherwise, investing blindly in PPF can be not only unproductive but also an unnecessary waste of resources that could have been utilised more effectively to generate wealth.

Being slow and steady may not always help

Do you know the current inflation rate? Have you ever calculated how long it might take for inflation to erode your savings after you retire? You can estimate the duration for which your retirement savings may last using a few different methods:

• Rule of 70: This is a quick method to estimate the number of years it takes for inflation to halve the value of your money. Simply divide 70 by the current inflation rate. For instance, with a 4% inflation rate, it would take approximately 70 / 4 = 17.5 years for your money to lose half its purchasing power.
• Retirement planning calculators: Numerous financial websites provide retirement planning calculators that take into account variables such as inflation, life expectancy, and your targeted retirement income. These tools can offer a more tailored estimate of the duration for which your savings may last.

Depending solely on fixed-income investments such as PPF during retirement may not be the most effective strategy, particularly in times of inflation. This is because the returns from fixed-income investments might not be sufficient to cover post-retirement expenses, especially considering the rising costs of goods and medical bills associated with age-related health conditions.

Asset allocation matters

Playing it safe can offer security, but can it help you outpace inflation? Debt instruments may provide peace of mind, but can they maintain your financial value over the long term? This is precisely where the emphasis should be on asset allocation. If you examine the asset allocation of PPF, you’ll notice it leans heavily towards debt, offering a limited opportunity to benefit from market growth. Investing in PPF is a long-term strategy designed to meet your extended financial goals. Therefore, it’s crucial to incorporate equity into your portfolio to combat inflation. Undoubtedly, equity investments, when compounded over the long term, offer market-linked returns that not only surpass inflation but also help build long-term wealth to support future expenses, while also leaving a legacy for future generations.

If a large portion of your portfolio is allocated to PPF, it may be time to adjust your investment strategy. If PPF already represents a substantial part of your portfolio, think about diversifying by incorporating other assets that offer both growth potential and income generation, such as stocks, mutual funds, or Real Estate Investment Trusts (REITs).

Additionally, once your PPF account reaches a satisfactory level for retirement, you can reduce your contributions while still keeping the account active with the minimum deposit. This will allow you to allocate more capital to investments in other areas.

Don’t ignore liquidity concerns

While PPF investments come with substantial benefits, their limited liquidity can be a disadvantage, particularly during significant market downturns. During a significant market downturn, your asset allocation may become heavily weighted towards debt. Ideally, you would want to sell some debt and purchase equity to realign with your target allocation. This rebalancing strategy helps capitalise on the potential upside when the market rebounds. However, with your funds in PPF, this flexibility is limited. This is because your funds are locked in PPF for 15 years.

A better alternative

If you prefer PPF to safeguard your hard-earned money from taxes, why not consider investing in Equity Linked Savings Schemes (ELSS)? The three-year lock-in period of ELSS is much less restrictive than the extended 15-year commitment of PPF. Additionally, with ELSS, you have the flexibility to increase your investments during market downturns, unlike PPF where the annual investment limit is capped at ₹1.5 lakhs. Compared to the debt-focused PPF, ELSS funds invest in the market, thereby helping to generate wealth from market growth and align with your financial goals.

ELSS does provide several appealing benefits over PPF, particularly for those willing to take on slightly more risk:

• Greater growth potential: ELSS invests in stocks, which historically have offered higher returns compared to debt instruments such as PPF. This can substantially enhance your wealth accumulation over the long term.
• Timing the market (to a degree): Although market timing is not foolproof, ELSS enables you to boost your investment during market downturns. This can potentially average out the cost per unit and result in better returns when the market rebounds. The fixed annual limit of PPF limits this flexibility.
• Investment horizon: Ideally, ELSS requires a longer investment horizon (preferably more than five years) to navigate market fluctuations and capitalise on potential growth. While PPF’s extended tenure naturally promotes a long-term perspective, investing the same amount in ELSS rather than PPF can result in significantly higher returns over 15 years. This challenges the traditional belief that a PPF investment is the essential cornerstone of one’s portfolio.

Assuming a monthly investment of ₹12,500 in any or each of these funds for 15 years, the following table illustrates the performance of ELSS funds versus PPF investments over a 15-year investment horizon, thus, allowing investors to choose what suits them best.

For those unfamiliar, a PPF investment provides tax benefits and assured returns, making it a valuable component of any investment portfolio. The key is not to entirely disregard PPF but to view it as part of a diversified strategy.

Ultimately, the most suitable approach depends on your financial situation and objectives. Seeking advice from a financial advisor can assist you in crafting a personalised plan that maximises the benefits of PPF while addressing your broader investment requirements.

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Published: 04 Apr 2024, 06:50 PM IST