PPF interest rate has been cut from 8% p.a. to 7.9% p.a. for the April-June quarter. This is the first time PPF interest rate has fallen below 8% p.a.
By the way, PPF is NOT the only investment product for which the interest rates have been cut. Interest rates for other small savings schemes (Sukanya Samriddhi Scheme and Senior Citizens Savings Scheme) have also been cut by 0.1% p.a.
The interest rates for the small savings schemes are notified every quarter by the Ministry of Finance.
Over the next few days or weeks, equity brigade will go berserk.
You will read many articles in newspapers about how PPF are headed for the bottom and that the returns from PPF are unlikely to beat inflation and that the investors should consider greater exposure to equity products including equity mutual funds.
Privately, when you meet insurance agents selling ULIPs or even MF distributors or advisors, you will be told how PPF is a poor investment choice.
PPF gives only 7.9% p.a. and rates will only go down. And equity funds easily give 13-15% p.a. Insurance agents usually don’t settle for claims lower than 18-19% p.a. in ULIPs.
Some agents will even have the audacity of suggesting you non-participating traditional plans (where the returns are known upfront) to lock in interest rates since the PPF returns are HEADED downwards.
Reading such articles, you might feel as if you made a mistake by investing in PPF.
Don’t be so harsh on yourself. PPF may not be a bad choice for you.
Ignore the noise. Continue your investment in PPF. Not easy to get guaranteed 7.9% p.a. returns these days. I assume PPF is suited to your needs.
What I am NOT saying?
I am not saying you should invest your entire savings in PPF.
I am not even saying if you should invest in PPF. Varies from case to case. If you have been investing in EPF, PPF may have a lesser role to play in your portfolio.
I am also not saying that you should stay away from equity investments. To be honest, I can’t do that. I make my living advising clients on equity portfolios. However, excess of everything is bad.
What I am saying?
What I am saying is that you should not let vested interests take you for a ride.
Both equity products and debt products such as PPF/EPF serve a purpose in your portfolio. Equity investments add potential for growth while debt investments provide stability.
You need to strike balance.
You need to decide asset allocation depending upon your risk appetite and investment horizon. You need to rebalance portfolio (or even reset asset allocation) at regular intervals.
Having a 100% equity portfolio is perhaps as or even more stupid than having no equity in your portfolio.
Yes, many equity funds have returned in excess of 20% over the last 12 months. 7.9% (or 8%) return in PPF may seem pale in comparison. But, aren’t we comparing apples and oranges? Do equity investments and PPF have similar risk-return profiles? Clearly, no.
It is quite possible that your equity investment will offer negative returns next year. This won’t happen with PPF.
Therefore, beware of the extreme equity enthusiasts.
It is not that PPF will give you 5% p.a. while equity gives you 15% p.a. over the long term.
PPF is an excellent debt product and remains so. It is a good choice for DEBT portion of your retirement portfolio. At the same time, you must consider equity investments too for your long term goals. In fact, the allocation to equity should be higher for long term goals.
For short term goals, allocation needs to be debt heavy. However, PPF may not be the right choice for such goals because of liquidity restrictions. Fixed deposits and short term debt mutual funds may be a better choice.