The middle-class Indians’ love for Public Provident Fund (PPF) is legendary. The government guaranteed investment scheme with high brand-recall, tax benefits and maturity benefits attracts the salaried. But do you know how you may be losing a lot of money by sticking to PPF? A study shows that PPF may be paying you tens of lakhs rupees less than you would have got if you had invested in tax-saving mutual funds, popularly known as Equity Linked Saving Schemes (ELSS), which gave equity market linked returns. Read on.
PPF pays you a rate of interest. This is determined by the central government on a quarterly basis. At present, the rate is 7.6% per annum. Do note that the interest is calculated on the minimum balance (in the PPF account) between 5th day and end of the month. The interest is paid on March 31 every year. A maximum of Rs 1,50,000 per annum can be deposited in PPF account every financial year, and the entire Rs 1.5 lakh gets income tax benefits.
What’s more the interest income is totally exempt from income tax. So, if you started investing Rs 12,500 a month for 15 years, you would have invested Rs 22.5 lakh. Along with interest, your corpus would now be at Rs 42.9 lakh. If you invested Rs 1.5 lakh at one go every year, the maturity amount would be slightly higher at Rs 44.4 lakh. These calculations are based on real returns.
You may be rejoicing how your money in the safest investment avenue (PPF) has grown in the last 15 years. But, let us burst your bubble! Actually, you lost a lot of money. There is no easier way of saying this: investing in PPF cost you lakhs, tens of lakhs over the last 15 years.
If you invested Rs 12,500 every month in equity-linked savings scheme or ELSS (tax-saving mutual funds), your returns would be far greater. The best performing ELSS clocked an annual return of over 21.6% in last 15 years. Yes, the return is real. This means your Rs 22.5 lakh investment would have grown to Rs 1.7 crore. That’s over Rs 1 crore more than your PPF corpus. Even if you assume that you paid 10% long-term capital gains tax on the gain (Rs 1.5 crore) of Rs 15 lakh, you still are left with a corpus of Rs 1.65 crore.
What if you invested in the worst performing ELSS? The PPF investor would still lose out. The worst performing ELSS product has gained 12.6% over the last 15 years. This means Rs 22.5 lakh invested would become Rs 67 lakh. Even if you had to pay 10% tax on gains of Rs 44 lakh, you would still be left with Rs 63 lakh in the worst performing ELSS versus Rs 43-44 lakh in PPF.
PPF and ELSS combo
What would have happened if you had invested half of your Rs 1.5 lakh in PPF and ELSS? So, every year you invested Rs 75,000 in PPF and the other Rs 75,000 in ELSS. After 15 years, the PPF portion would be Rs 22 lakh and the ELSS portion would be Rs 34 lakh in the worst ELSS and Rs 84 lakh in the best ELSS. Clearly, a blended approach would have helped you capture guaranteed returns from PPF and market-linked in ELSS
So, do you still want to lose on potentially lakhs of rupees by sticking only to PPF? Take your pick.