Explained: Why PPF Should Not Be A Long Term Bet of 15-Year Lock In Period?

Public Provident Fund (PPF) is a government backed scheme that is popular for its long term tenure and EEE tax benefits. PPF comes with a lock-in tenure of 15 years and currently offers a return of 7.1 % per annum (compounded yearly) for Q1FY24 and the Interest earned is tax free under Income Tax Act. Deposits can be made in lump sums or in installments and are eligible for tax benefits under section 80C. The minimum deposit is 500 rupees, while the maximum deposit in a fiscal year is 1.50 lakh rupees. Although PPF is a well-liked investment strategy for fixed income investors, financial gurus believe that it is not a good long-term investment for investors for the reasons listed below.

Shruti Jain, CSO, Arihant Capital

While PPF (Public Provident Fund) offers tax benefits and a fixed interest rate, it may not be the best long-term bet due to its 15-year lock-in period. The returns on PPF are relatively low compared to other investment avenues such as equity or mutual funds. Additionally, the interest rates on PPF are subject to change, which can impact the overall returns. Furthermore, the lack of liquidity and limited flexibility in accessing funds during emergencies or financial needs make PPF less suitable for long-term investment goals. Exploring diversified investment options may provide better growth potential and flexibility in managing your finances.

Pratapsingh Nathani, chairman and MD at Beacon Trusteeship

In recent years, the interest rate on Public Provident Fund (PPF) has remained stagnant at around 7-8%, a rate set by the government. Unfortunately, this falls short compared to the returns offered by alternative long-term investment options like equity mutual funds and fixed deposits. For instance, equity mutual funds have yielded average returns of approximately 12% over the past decade.

• Low returns: The interest rate on PPF is fixed by the government and has been in the range of 7-8% for the past few years. This is lower than the returns offered by other long-term investment options, such as equity mutual funds and fixed deposits. For example, the average returns of equity mutual funds over the past 10 years have been around 12%.

• Lock-in period: The money invested in PPF is locked in for a period of 15 years. This means that you cannot withdraw the money before the end of the lock-in period without incurring a penalty. This can be a major drawback if you need to access your money for any reason, such as an emergency or a major life event.

• Tax benefits: The tax benefits offered by PPF are not as attractive as they used to be. In the past, PPF contributions were eligible for a deduction under Section 80C of the Income Tax Act. However, this deduction has now been capped at ₹1.5 lakh per year. This means that if you are already investing the maximum amount under Section 80C, you will not be able to claim any additional tax benefits for your PPF contributions.

• Limited liquidity: PPF is a low-risk investment, but it also has limited liquidity. This means that it may be difficult to sell your PPF investments quickly if you need to access the money.

• Inflation risk: The interest rate on PPF is fixed, which means that your returns will not keep up with inflation. This means that the value of your PPF investments will erode over time.

Given these limitations, PPF may not be the ideal choice for long-term financial goals. Those seeking higher returns and greater liquidity should explore alternative investment options such as equity mutual funds or fixed deposits.

Satyen Kothari, the founder and CEO of Cube Wealth

PPF (Public Provident Fund) may not be an ideal long-term bet with a 15-year lock-in period due to several reasons. Firstly, the interest rate on PPF is subject to change and may not always beat inflation. Secondly, the returns from PPF are tax-free, but they may not provide substantial growth compared to other investment options. Additionally, PPF lacks flexibility, as premature withdrawals and loan facilities are limited. Considering these factors, diversifying investments across different asset classes like equities and mutual funds may offer better potential returns over the long term.

Ranjan Sardar Finance Officer, Mahindra University Hyderabad

While the Public Provident Fund (PPF) offers certain advantages, it may not be the ideal long-term investment option for everyone due to its 15-year lock-in period. Here are a few reasons why PPF may not be the best choice for a long-term bet:

Limited liquidity: The lock-in period of 15 years restricts access to the funds, which can be a drawback if you require immediate liquidity for unforeseen expenses or investment opportunities. It may not be suitable for individuals who prefer flexibility and easy access to their funds.

Relatively low returns: While PPF provides a guaranteed and tax-free return, the interest rates offered by PPF tend to be lower compared to other investment avenues such as equity or mutual funds. Over a 15-year period, the returns may not keep pace with inflation, leading to relatively lower wealth accumulation.

Lack of flexibility: The contribution amount in PPF is a fixed-income investment with limited diversification options. It doesn't offer the opportunity to explore higher-risk, potentially higher-return investments that can be beneficial for long-term wealth creation. This lack of flexibility may not align with the changing financial goals or circumstances of an individual over a 15-year period.

Inflation risk: PPF returns may not effectively counter inflation over a long-term horizon. Inflation erodes the purchasing power of money, and the relatively low returns from PPF may not be sufficient to maintain the value of investments in the face of rising prices.