Public Provident Fund (PPF) is one of the safest forms of investments, however much is not known how to make the best out of this excellent investment instruments. Most of the people just end up depositing funds into this instrument to save tax rather than using it as a crucial tool for their financial planning. Before I leak out these tips, I would first like if you could go via our article Public Provident Fund which details the essential aspects associated with PPF.
TIP 1 : 1 lac limit doesn’t mean Invest 1 lac
I come across with so many young professionals who haven’t yet opened a PPF account. The first step is to open a PPF account at the earliest. Considering the maximum amount which you can deposit in a PPF account is limited to Rs. 100,000, not many investors can deposit complete Rs. 1 lac in one year into a PPF account. Even if they could, it would form a material part of their savings. If you have a wife, then you would probably have 2 PPF accounts, hence increasing the maximum amount which you can deposit in a PPF account for the entire family to Rs. 2lac. The more family members you have, the more lacs you can invest into a PPF account. For example, if you are a family of 2 adult and 2 children, then you can have 4 PPF accounts and can deposit 2 x Rs. 1 lac = Rs. 2 lac per year into a PPF account. [Article updated based upon contribution by Ajay & Victor. Contribution to a minor’s account is subject to 1 lac limit of the parent).
Now, you may realise that if you are investing 2 lac into a PPF account, you would probably be left with almost nothing to invest in other asset classes such as Mutual Funds or Gold, etc. to enhance your overall portfolio return. On the contrary, if you are lucky enough whereby the maximum allowable amount for PPF deposit is not a material chunk of your saving, then go for the entire Rs. 1 lac deposit.
TIP 2 : Open PPF accounts for the Family over 2-3 years
The background behind this tip is – a PPF account has an initial maturity period of 15 years. After 15 years, you can extend a PPF account for a block period of 5 years till infinity. If you look closely into it, after 15 years, you would have an opportunity to encash the maturity proceeds after every 5 years. If you have a family of 4, instead of opening their PPF account all at once, you may want to open it within 1-4 years gap – ideally after every 2 years. You may be wondering what impact it may have. For this, I would like to draw your attention towards to the image below. You may notice that it reflects a situation for a family of 4 people. Each of the family member opened a PPF account in a gap of 2 years (2000, 2002, 2004 and 2006). After the initial maturity period of 15 years, each PPF account matures in next 5 years. In our example, the first PPF account matures in year 2014. Should you need the funds, you may choose to encash your PPF account. Else you may extend the PPF account for another 5 years. Hence after 2014, should you choose to extend the maturity of your PPF account for next 5 years, your family would have a choice after every 1-2 years to encash the maturity proceeds of the PPF account of any of the member of the family (reflect as Green in the cells). This empowers the family with tax free liquidity every other year.
TIP 3 : PPF is for Very Long Term – Longer the Better
PPF is a long term investment and banks upon the Power of Compounding – the more the number of years for which you invest into PPF, the better goes the returns. Take an ilustration in the table below which assumes an annual investment of Rs. 50K for 25 years at 8.5% interest. You would notice that in the last column, yield on the investment keeps on increasing each year from 8.5% in first year and reaches a blasting 28% in year 2025. It is not because the interest rate increased – which in fact is assumed to be stable at 8.5%. It is all owing to compounding effect whereby interest is paid on interest every year. To summarise – the longer you invest, the better would be the returns.
TIP 4. Monthly SIP into PPF
If you want best results out of investing into PPF account, invest into it on a monthly basis. PPF account limits a person to invest more than 12 installments in a year, hence investing into PPF via monthly ECS (just like a Mutual Fund SIP) is a best approach. This reduces the overhead to visit the bank in person to deposit the funds into your PPF account as well as inculcates a financial discipline to invest on a monthly basis. You would realise in no time that it would become a part of your monthly budget and habit which will give long term benefits. You don’t need to invest in a balanced mutual fund. Invest the debt component of your portfolio into PPF and avoid paying charges on your balanced funds.
And make sure that this investment into your PPF account is before 5th of the month. PPF account gives interest on minimum balance between 5th and end of the month. For example, if you had Rs. 3 lac in your PPF account on 1 Jan 2012 and you deposited Rs. 50K on 10th Jan. Your month end balance was Rs. 3.5 lac. You shall be provided interest on Rs. 3 lac for the month of January.
TIP 5. NRIs to open PPF before leaving India
If you would read our article Public Provident Fund, you would realise that NRIs can not open a PPF account. However, they can continue to invest into PPF account for the initial duration of the PPF account (15 years). Hence, if you are intending to leave India, you should open a PPF account before leaving India. After leaving India, NRIs can continue to invest into their PPF account on a non repatriable basis.
By now you would have realised that PPF as an instrument can give you best financial gains if you continue to invest into it for a long term and enjoy it’s tax free benefit which is largely dependent upon the power of compounding. At the same time, you would also want to consider that not all your savings should get parked into PPF and that you diversify your assets into a mix of assets which include Debt, Equity, Gold, etc. Happy Investing !
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