PPF (Public provident fund) holds an iconic status as far as saving/investment options are concerned but in recent years interest rates on PPF investments have been declining steadily latest interest rates on PPF is 7.9 % for Q1 2017-2018. Interest rates on PPF now trail yields on government securities and hence will always stay in line with interest rates on other saving rates in market.
The graph below shows how interest rates have moved for your PPF investments in last few years.
Interest rates in PPF have slowly but surely followed a downward trend. In the year 2016-2017 Government of India decided to link PPF interest rates to the yields on benchmark securities. So the elevated status of PPF which used to enjoy higher rates of return than other government securities is now diminishing.
Make no mistake PPF is still one of the best risk-free saving instrument. Returns are higher than other comparable securities, it provides upfront tax benefits and interest income is also tax-free.
In spite of all these benefits, PPF is slowly losing its charm as the default long term investment option. Primarily driven by following reasons.
- Interest rates are now aligned to market interest rates
- Long lock in periods ( 15 years) results in investments being illiquid for long periods
- Market interest rates are linked to inflation indicators which might not accurately capture the price increase middle class Indian are experiencing.
- With Maturing equity markets and mutual funds consistently outperforming index retail investors have more lucrative avenues to grow their money.
So coming back to our important question Are PPF investments dead?
Well PPF investments are definitely not dead but their lure as an option with higher returns than comparable small savings instruments has gone away, and with mutual providing better avenues to grow your money PPF is no longer the best long-term investment choice.
See the graph below to understand how your PPF investments will grow if you start investing now ( Please use 7.9% as the current interest rate)
So as a retail investor what should you do? Here is what I suggest
- Do not panic
- Review your portfolio
- Set up a balanced portfolio ( What is a balanced portfolio)
- As interest rate turn PPF investments can give better returns so do not strike it off your portfolio
- If you are not able to do it your self-talk to your financial advisor.