Don't listen to your father, stop investing in PPF

Equity Linked Schemes are better in almost every way.

 |  3-minute read |   07-11-2016
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In 2006 when I started my first job, one of the first advice I got from my father was to immediately open a PPF account and start contributing a part of my annual savings.

Since its launch in 1968, PPF (Public Provident Fund) accounts have become a tradition, which gets passed from one generation to another. Our parents managed their savings in PPF and asked us to do the same.

In most cases, when a child is born, a PPF account is opened in her name, and every year, Rs 1.5 lakh is duly deposited in the account.

PPF accounts are a favoured instrument to invest for the long term, as well as save taxes. It is the money you can stash away and forget about. A disciplined way to save for the long term.

Back in the '80s and '90s, PPF, with its superior returns and the fact that it allowed you tax savings, was probably the best saving instrument in the Indian market. But looking at current returns and availability of alternate instruments, it is definitely not the best investment.

In fact, you might end up losing about Rs 20-30 lakh over a period of 15 years if you invest in PPF.

Let me explain how:

PPF interest rates have been slowly reducing in line with market interest rates. Unlike earlier, when sometimes it was artificially kept high, now they are linked to market rates - which, in turn, are linked to prevailing inflation. Current PPF interest rates are eight per cent.

So, let’s say you invest Rs 1.5 lakh per annum in your PPF account, which is the maximum allowed at the end of 15 years. You will end up with a corpus of approximately Rs 40.72 lakh in your PPF account.

See the graph below to understand how your money grows:

c1_110716021936.jpg Source: PPF Calculator from Bodhik.

So, a total investment of Rs 22.5 lakh over 15 years creates a final corpus of Rs 40.72 lakh - a growth of Rs 18.22 lakh.

In contrast, average returns on top Equity Linked Savings Scheme (ELSS) in the last ten years have varied between 12-14 per cent per annum.

Taking a conservative return of 12 per cent, if you invest Rs 1.5 lakh every year (using a monthly SIP) in these ELSS schemes, your final corpus at the end of 15 years will be approximately Rs 63.1 lakh. This amount is approximately 57 per cent higher than returns from PPF.

chart2_110716020624.jpg *ELSS returns are assumed as 12 per cent per annum.

ELSS provide not just higher returns, but your money is blocked for a lesser period (three years). Whereas, in case of PPF it is 15 years. ELSS provides exactly similar benefits as PPF in terms of tax savings.

So if you are looking to invest for long term and save taxes, it is time to forget your father’s advice and bail out from PPF.

Equity Linked Schemes are better in almost every way. They provide higher returns, better liquidity and multiple options to switch investments.

Also read: Why you should hold on to your investment in PSUs



Sarabdeep Singh Sarabdeep Singh @sarabdeep

The writer is co-founder of Bodhik, an online investment management service.

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