My only investment in fixed income is PPF. I am very puzzled as experts have various opinions about it. My PPF investments constitute 12.5 per cent of my total investments and have completed only six years. So, should I continue to invest in PPF or look for any other avenue? My retirement has begun.
- Ashish
The short answer to your question is that carry on with PPF and take the tax-free income primarily because your retirement has begun. But I will tell you the story for and against PPF. And why it is so popular.
PPF is popular because it is one of the oldest tax-saving instruments and gets you multiple benefits. One is that it carries the sovereign guarantee. The other is that the interest earned on PPF is completely tax-free. Third is that on investment, it gets you tax benefits.
PPF has a history and it gives guaranteed income. And historically in India, we have had very high inflation and high-interest rates. PPF used to earn 11 per cent as well, that, too, not very long ago. So, the combination of safety, tax-free returns and getting a tax benefit on your investments, along with a perceived higher return, is what made it popular. If your parents and grandparents used to invest in PPF and it worked nicely for them, they tell their children that open a PPF account. And rightly so.
In earlier times, stock markets were not accessible. Mutual funds were not there. They used to be a seasonal investment. Also, people were not used to the volatility of the stock market. You could not do a SIP 15 years ago the way you can do it now. And therefore, PPF became popular.
But the disadvantage of PPF is that in the coming time, I visualise that interest rates will come down and equity turns out to be a better investment avenue for a 15-year term. PPF is effectively a 15-year SIP in a fixed-income fund. So, if you do a regular SIP even in a below-average equity fund for such a long period, I am confident that it will beat PPF.
That is the reason why it is not a great accumulation vehicle but most people who have already accumulated in it, I think it is worthwhile to hold it because there is no other investment vehicle where your accumulation will generate tax-free guaranteed income. So, if you have done it, hold it. If you are still accumulating it, say for youngsters, I would say do your SIP.
There could be a role of PPF even for those people but after a point. Once your scale goes up and you start investing a significant amount, say Rs 1 lakh a month, then it is fine to invest Rs 10-12,000 in PPF. This is because there should be a part of fixed income in every portfolio. And you are investing a very small part which will accumulate into something and generate tax-free income. So, it can be there but it is not something to start with for youngsters. So, the appropriateness of PPF depends on different people in a different context.
