Check how PPF interest rate change affects maturity amount.

Public Provident Fund (PPF) investment: Did you invest in PPF for turning your monthly savings to Rs 1 crore? If yes, then as per current interest rate, your goal may take a longer time than what you may have anticipated at the time of starting the PPF account. However, if the rates go up in future, you may even reach your goal faster than anticipated in the beginning.

For the last five years, the average rate of PPF interest was around 8 per cent. This was lowered to 7.1 per cent for the current April-June quarter. The PPF rate was cut to 7.1 per cent at the end of March this year when the average 10-year bond yield was 6.42 per cent (January-March). The PPF interest rates have never been below 7 per cent since 1974. (Check how PPF interest rate has changed since 1968).

The PPF interest rate in India is linked to the 10-year government bond yield. A fall in bond yield is likely to result in a fall in PPF interest rate. In recent times, there has been a consistent fall in the government bond yield. The average 10-year government bond yield since April 1 this year has been around 6.07 per cent. The 10-year government bond yield as of today is 5.9 per cent. It has remained around 5.7 to 5.9 per cent for the last 15 days. Hence, it won’t be a surprise if the government goes for a further cut in the PPF interest rate. Doing this would bring the PPF rate below 7 per cent for the first time since 1974.

The fall in the PPF interest rate may lead to a lower maturity amount at the end of the investment period, say 15, 20, 25…years. If someone started the PPF last year and targetted to save Rs 1 crore till maturity, he/she may have to remain invested for a bit longer time now if the current interest rate remains in force. However, when it comes to the PPF interest rate, no final amount can be anticipated in advance. As the rates keep changing throughout the investment period. (Read what PPF may return in 15,20, 25 years if interest rate is fixed at 7.9%)

Historically, PPF has fetched high interest of up to 12 per cent (between 1996 and 2000). While the lowest rate clocked by PPF has been 4.8 per cent in the initial days of the scheme. So it would be best for investors to remain invested in the PPF account till maturity, instead of worrying about interest rates which may go up or down throughout the investment period.