I am sure that I am committing
blasphemy if I were to make such a claim in any other country. PPF has been
unquestionably part of every person’s long term financial planning in this
country.
PPF has been a mainstay
for many in India where there is no formal social security system. More often than not, it is the parents who
insist upon opening a PPF account for their child when they receive their first
salary. While many open a PPF account in their child’s name as soon as they are
born so that the maturity coincides for their higher education requirement.
Well, nothing wrong with this
investment being a de-facto instrument in many investors’ portfolio.
Following may be considered as
the reasons why PPF is popular:-
- It disciplines you to remain invested for 15 long years. Money is hardly withdrawn from this account even during emergency,
- A habit of regular investments year on year is inculcated as a part of annual tax saving ritual.
- Unlike other fixed interest options, interest on PPF is exempt from tax and so is maturity.
- It is backed by sovereign guarantee and cannot be attached by Income Tax department.
But is PPF by itself, good enough to build a suitably large retirement
corpus?
We at AIMS have believed that a portfolio should be built keeping in
mind the risk profile of the investor. We have always felt that a person should
invest in fixed interest securities if the goal is 1-3 years away; and equity
should be the preferred choice if the goal is long term (viz upwards of 5-7
years). We have been taught that debt is safe in short term, but riskier in
long term as it may not be able to beat inflation over a longer period. The opposite is true for equities----less
volatile in the long term.
By the above logic, PPF goes against the basic tenets of long term
investing.
The other argument against PPF is that it runs the interest rate risk
though not many realize it. With effect from December 2011, PPF interest rates
have been linked to the prevailing interest rates in the economy—in other words
they are no longer fixed. This means that PPF rates change every year and the
new rate becomes effective at the beginning of every financial year. The new
rates are applicable for the entire accumulated corpus. In a falling interest rate
scenario as is the case at present, this may become quite unattractive.
Therefore, if an investor is able to stomach some risk, she should
definitely consider a higher exposure to equity as that will provide higher long
term returns, which is what is needed to build a healthy retirement corpus.
Honestly speaking, we have not been a great proponent of PPF. Data prove
our belief. A better option can be ELSS funds under Section 80 C though not so
popular. They have been around for roughly 20 years now, but are not so popular
despite having a stellar track record.
An ELSS fund which recently completed 19 years grew by 94 times over 19
years, which works out to 26.82% CAGR (compounded annual growth rate)
If someone has been investing an annual amount of Rs. 10,000 in PPF for the
past 20 years, then his total investment would have been 2 lakh and the corpus
in PPF would have been a modest Rs. 5, 15,035 as on 30 September 2015.The same
annual investment in the above mentioned tax saving fund would have created a
massive corpus of Rs.42, 90,480. The irony is that hardly anyone knows about
this even though the data is available in the public domain.
The above data convincingly proves that equity scores much higher than
debt in the longer term. One may, of course, question that the fund I have
chosen may be a better performing fund and so there may be a bias. I analyzed
the performance of all the 12 tax saving funds over a 15 year period starting
from March 2000 to March 2015. The best performing fund generated 22% CAGR,
while the worst gave a paltry 7.68% CAGR. The median performance was around
15%, which is much higher than the returns earned in PPF.
Finally, I want to conclude by saying that while PPF may seem safe, the
question you need to ask yourself is whether you will be able to meet your
retirement goals with it considering the lifestyle inflation we are exposed to.
The choice is yours, as the money is yours.
