Risks of investing in PPF

Dec 05, 2023

A lot of individuals debate whether to invest in the Public Provident Fund (PPF) or Equity Linked Savings Scheme (ELSS), as both offer a tax benefit under Section 80C. One is promoted as completely risk-free and the other as risky.

To compare both these investments is wrong. We wrote about it in detail in Do NOT compare ELSS with PPF.

And while the PPF is an excellent investment avenue, don’t blindly invest in it. Basavaraj Tonagatti of BasuNivesh explains.  

Liquidity Risk

There are various conditions to taking a loan (which has to be repaid) and there are also conditions regarding premature withdrawals.

The loan and withdrawal facility come with their own set of rules and regulations. You can’t access the money as per your own requirements. You have to by the laid down rules and regulations. Understand all of it carefully before investing.

This risk will ease after a year (to avail loan) and especially after 5 years (to avail withdrawal). However, the real liquidity risk will vanish to certain extent post 15 years completion. Because after 15 years completion, one withdrawal can be taken in each financial year, subject to maximum limit 60% of balance credit at the time of maturity in the block of 5 years.

Interest Rate Risk

The interest rate is adjusted once in a quarter and is fixed by the Ministry of Finance.

The interest is calculated for the calendar month on the lowest balance in the account between the close of the fifth day and the end of the month. The interest is credited to the account at the end of each financial year.

The current interest rate is 7.1%. It has moved from 5% (1970s) to a peak of around 12% to now 7.1%. Don’t assume this rate will be static all through your investment cycle.

Goal Mismatch Risk

Many people blindly invest without understanding their actual need. If you need the money in a few years, then obviously PPF is not a suitable product. Make sure that your financial goals match your PPF maturity date. Understand your requirement and then invest.

Policy Risk

The major motive for PPF investors is safety and the tax-free nature of interest and maturity. However, policymakers can change the rules. You may invest today with an assumption that it will remain tax free, but later on the rules could change.

Take the Employee Provident Fund (EPF). Earlier interest earned on your contribution (employee contribution) and your employer’s contribution was tax free. However, the limit then was set for your contribution (Rs 2,50,000 a year). Beyond this, whatever the interest earned by additional contribution will be taxable income for the employee on yearly basis.

Inflation Risk

Though an excellent fixed-income instrument, it is not sufficient to fulfil your long-term financial goals. You need to also invest in equity to generate inflation-adjusted returns. Don’t put all your savings into the Rs 1.5 lakh limit without investing in equity.

Based on your goals, plan your asset allocation and let PPF be part of the debt allocation. If you are following the goal-based investing, and PPF is part of the debt portfolio, then don’t let the entire debt portion be taken over by PPF. Mainly because the purpose of debt is also for rebalancing, and you can’t partially withdraw (as per your terms) to balance the portfolio. In such a situation, debt funds will be handy for you.

Add a Comment
Please login or register to post a comment.
ninan joseph
Dec 10 2023 11:46 AM
15% of incremental funds in EPF can be invested in Equities. I think it is only for this reason SBI Nifty 50 ETF has a corpus of 163,847 crore. There is no other ETF who can match the AUM. This increase is only because of the above.

So not sure if the statement "You need to also invest in equity is ok".
© Copyright 2024 Morningstar, Inc. All rights reserved.
Terms of Use    Privacy Policy
© Copyright 2024 Morningstar, Inc. All rights reserved. Please read our Terms of Use above. This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.
As of December 1st, 2023, the ESG-related information, methodologies, tools, ratings, data and opinions contained or reflected herein are not directed to or intended for use or distribution to India-based clients or users and their distribution to Indian resident individuals or entities is not permitted, and Morningstar/Sustainalytics accepts no responsibility or liability whatsoever for the actions of third parties in this respect.
Company: Morningstar India Private Limited; Regd. Office: 9th floor, Platinum Technopark, Plot No. 17/18, Sector 30A, Vashi, Navi Mumbai – 400705, Maharashtra, India; CIN: U72300MH2004PTC245103; Telephone No.: +91-22-61217100; Fax No.: +91-22-61217200; Contact: Morningstar India Help Desk (e-mail: helpdesk.in@morningstar.com) in case of queries or grievances.