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Should you invest in PPF?

PPF (Public Provident Fund) is one of the common investment options among Indians - be it salaried individuals or someone else. In addition to offering Income Tax benefits under Section 80C, it also offers assured returns (current rate of interest is 7.6%). And even the interest earned is also completely tax free.

 But is it really worth investing in PPF or are your investments better off in some other avenues?

 Here are some pros and cons of investing in PPF.

 Pros
  • Tax benefit up to Rs. 150,000 under section 80C of Indian Income Tax Act. 
  • Good rate of returns - currently at 7.6%. Rate of returns is typically 50-100 bps higher than that of FD in major banks. Effective returns are more since the interest earned is also tax free. 
  • Since there is a lock in period of 7 years (after which you can start withdrawing partially), this can form a habit of forced savings, if you are someone who is prone to impulse buying. Over the years, the amount of interest you can earn on your deposits is really good. Reason - compounding!
  • If needed, you can take a loan against PPF also. Not an ideal case scenario, but can be handy if you are in dire need of money.
  • You can begin with a very small amount. Minimum deposit needed to start a PPPF account is Rs. 500 only!
Cons
  • Historically stock markets (equity or equity focused MFs) have given a much higher returns. While past performance is not a guarantee of future performance, one can potentially get much better returns, if the past trends continues. 
  • If you are a salaried individual & have PF facility, you may get better returns if you invest surplus money in voluntary PF. Typically rate of interest in PF (and voluntary PF) have been around 50-100 bps higher than in PPF. 
  • If you are hard pressed for liquidity, investing in PPF may lead to even more cash crunch due to its lock in period. 

Do consider the above factors before you decide for or against investing in PPF.

My take -

IT is a good investment for getting assured returns,  so one should be investing money in it. If you are hard pressed for liquidity, you can invest small amounts. If you have lot of excess liquidity, you can max it out by investing Rs. 150,000 (the upper limit) irrespective of other tax benefits you are getting under section IT 80C. 

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 You can also read this post on BeingFinWise
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