Public Provident Fund (PPF) is one of the popular long term investment options among Indians. Till a few years, you could only open a PPF account through a post office. The scenario has changed and you can now invest through any bank account. If you have a savings account and have availed the net banking features, you can easily open a PPF account from the comfort of your home.
After logging in to your net banking with your personal details, click on the PPF account. You can choose standing instruction where a certain amount of money will be auto-debited from your savings account or invest whenever you wish.
Interested in PPF? Here are some of the advantages and disadvantages of investing in PPF.
Advantages of PPF
Safest Investment Avenue:
The biggest benefit of public provident fund is that it is backed by the government. This means that there are no chances of defaults or your principal amount losing value. In other forms of investment such as equities, your initial investment may reduce. While the probability of loss reduces in the long term, many investors want a secure investment option that is fully backed by the government.
Assured returns
PPF comes with assured returns. The rate of interest is revised every quarter and you can easily know the prevailing rate of interest. This gives comfort and helps you to sleep peacefully at night as you know that your investments are safe and it is giving you a certain interest rate.
Also, the returns are compounded annually.
Tax benefits
PPF is one of the investment options that fall under Exempt-Exempt-Exempt (EEE) category. For investments up to Rs.1.5 lakh per year, you can avail tax deductions under section 80C of the Income Tax law. Also, the accumulated amount and interest is also exempted from tax at the time of redemption.
Options to invest in PPF
You can invest in public provident fund by putting a standing instruction of auto-debit from your savings account. This will allow you to invest in a systematic manner without facing any trouble to invest a large amount near the financial year end. Also, lumpsum investment is also available and you can invest as per your wish.
Disadvantages of PPF:
Accumulated Corpus may not high
While PPF gives assured interest, the accumulated corpus may not be as high compared to other equity investment options like equity-linked saving scheme. Past data shows that equity mutual funds have outperformed other asset classes in the long run. So, if you can take risks and want a higher investment corpus, invest in equity mutual fund.
Longer lock-in period
Provident fund investment has a longer lock-in period of 15 years. Thus, it is not liquid like other investment options like mutual funds that do not have any lock-in. Also, equity-linked saving scheme(ELSS) a tax saving mutual fund under Section 80C has the lowest lock-in period of 3 years.
Upper limit
PPF has an upper investment limit of Rs.1.5 lakh. Investments above this limit do not fetch any returns. Other investment options do not have any upper limit.
Conclusion:
Before you invest in PPF, you need to check your total investments and segregate it into debt and equity asset class. Contributions to your employee provident fund and public provident fund fall in the debt category. Fixed deposits are also debt instruments. Calculate your debt allocation. If this is higher than your ideal portfolio allocation, you can look at investing in PPF at the later date or reduce allocation to other debt instruments.
Also, don’t rely solely on PPF to build your retirement corpus. Invest in other investment options that generate high returns as well. This will help to balance stability with growth.
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