Exploring Public Provident Fund as an investment avenue

Where Employees Provident Fund serves all salaried employees, the Public Provident Fund serves everyone - the employed, the un-employed, even children and housewives. The access to the fund is also quite easy as any post office and selected State Bank of India will serve the investor. The purpose of the provident funds is to help people in their retirement periods. Hence the EPF and PPF are for long term savings. Let us look at the details of the fund now.

Current Income: The returns from the fund are in the form of interest paid. The interest rate currently is 8 per cent compounded annually. The interest however is not paid out but is compounded (like a bank recurring deposit) till the maturity or withdrawal. With the current levels of inflation, real and stated, the return from the PPF is very low. This is a typical asset class mismatch.

Capital Appreciation: Being a typical debt investment, there is no capital appreciation for the investment.

Risk: There is hardly any risk for the capital or the returns from the PPF deposit. The risk however is with inflation reducing the value of the returns to a very low level. The risk is also in the long lock-in period of 15 years.

Liquidity: The PPF gives very little liquidity too. The fund, as mentioned earlier, is for a minimum of 15 years. This can be extended in further period of 5 years each indefinitely (till the account holder is no more).

The liquidity is in the form of withdrawals that can be made from the fund from the 7th year onwards. The withdrawal value is however limited to a maximum of 50 per cent of the average of the last 3 years' fund values. After the 7th year, one withdrawal can be made every year, based on the same condition.

In case of death of the account holder before the maturity of the account, the fund will be paid to the nominee/ legal heir.

Tax Treatment: This is where the PPF scores very high. The PPF comes under the exempt category. This means that the amount invested gets tax benefits, the interest is not taxed and so is the final maturity amount.

The investment gets benefits under Section 80C of the IT Act. The investment however is limited to a maximum of Rs 70,000 per year per person. This limit of Rs 70,000 includes the deposits made in the name of any dependent children.

Some other unique benefits from the fund are that:

There is not wealth tax on the value of the fund: In case of insolvency the money in the fund will not be attached to the assets. So only this investment is truly ours, come what may. (Except for education in a philosophical sense). This feature can be very useful particularly for business people in high risk industries. The fund cannot help anyone if there is tax evasion though.

Convenience: Again the fund scores high on convenience. As a savings tool, it is incomparable in terms of the flexibility of payment and quantum. We can make up to 12 contributions per year. Each contribution can be as low as Rs 100 subject to a minimum of only Rs 500 per year.

There has to be atleast one contribution per year. In case no payment could be done for a whole year, there is a charge of Rs 50 when the next investment is made. The objective is to make savings as comfortable and convenient to the poorest of investor as imaginable.

The limitation is that the fund is yet to go online. So we have to carry our passbook and also face a queue to make the payment every time.