{"id":449,"date":"2019-01-15T20:35:11","date_gmt":"2019-01-15T15:05:11","guid":{"rendered":"https:\/\/srinivesh.in\/blog\/?p=449"},"modified":"2019-07-22T11:55:57","modified_gmt":"2019-07-22T06:25:57","slug":"personal-finance-rule-3-max-out-all-forms-of-pf","status":"publish","type":"post","link":"https:\/\/srinivesh.in\/blog\/personal-finance-rule-3-max-out-all-forms-of-pf\/","title":{"rendered":"Personal Finance Rule 3 – Max out all forms of PF"},"content":{"rendered":"

This short post reiterates the importance of an essential debt component of any portfolio in India – Employee and Public Provident Fund.\u00a0 This is a companion post to the India version of Harold Pollack’s Index Card – Pollack\u2019s Index Card: All the financial advice that you ever need \u2013 India version<\/a>. While there are different types and sub-types of provident funds, this article is generic to all of them. <\/span><\/p>\n

 <\/p>\n

The essence of the rule – Treat PF as a debt product and make it part of your portfolio<\/span><\/h3>\n

Employee Provident Fund (EPF, and its subtypes like GPF, SPF)\u00a0 and Public Provident Fund (PPF) are the most well known provident funds in India. There are important differences between them.\u00a0 The most important factors common to both of them are:<\/span><\/p>\n

    \n
  1. They earn a specific amount of interest every year (the interest rate may vary from period to period, but it follows a steady trend)<\/span><\/li>\n
  2. They qualify for the most preferred tax treatment – EEE or Exempt, Exempt, Exempt\u00a0 There are no other debt products that tick the boxes on the second and third ‘E’s<\/span><\/li>\n
  3. They are long term instruments – associated with employment (EPF) or tied to a term (15 years for PPF)<\/span><\/li>\n
  4. They provide some level of liquidity <\/span><\/li>\n<\/ol>\n

    Point 1 qualifies them as a debt instrument.\u00a0 Point 2 makes them an excellent debt instrument.\u00a0 Points 3 and 4 put them in the basket of long-term instruments. <\/span><\/p>\n

    Any sensible portfolio needs to have space for debt\/fixed income instruments.\u00a0 The various PFs should be in the debt part of the portfolio. In fact, one can argue that PFs + Liquid\/overnight funds are all that one needs as debt instruments.\u00a0 There are two major mistakes that people make, and we discuss them in the next two paragraphs.<\/span><\/p>\n

      \n
    1. Not investing in PPF, or investing enough in PPF<\/span><\/li>\n
    2. Making too many withdrawals from EPF<\/span><\/li>\n<\/ol>\n

      Public Provident Fund – The Rahul Dravid of Personal Finance<\/span><\/h3>\n

      Yes, PPF is not glamorous. A lot of people use it as a filler for 80(C) and balk at the 15-year minimum life of the account.\u00a0 But the fact is that it is one of the best debt instruments, and it is available to almost all Indians.\u00a0 The benefits of PPF are very well explained in this blog post. PPF investment is a must for every investor<\/a>\u00a0 In addition to the benevolent tax treatment, long-term nature, and stability the post also mentions that PPF can serve as an excellent illustration for compounding.\u00a0 <\/span><\/p>\n

      Assuming that one invests the entire permissible amount – 1.5 lac – by Apr 5, and the interest rate is 8%, here is how the account grows. <\/span><\/p>\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n
      Year<\/span><\/td>\nFin Year Begin<\/span><\/td>\nContribution <\/span><\/td>\n‘Prinicipal’ for the year<\/span><\/td>\nInterest Rate<\/span><\/td>\nInterest<\/span><\/td>\nFinal Balance<\/span><\/td>\n<\/tr>\n
      1<\/span><\/td>\n2018<\/span><\/td>\n\u00a0\u00a0\u00a0\u00a0\u00a0 1,50,000<\/span><\/td>\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 1,50,000<\/span><\/td>\n8%<\/span><\/td>\n\u00a0\u00a0\u00a0 12,000<\/span><\/td>\n\u00a0\u00a0\u00a0 1,62,000<\/span><\/td>\n<\/tr>\n
      2<\/span><\/td>\n2019<\/span><\/td>\n\u00a0\u00a0\u00a0\u00a0\u00a0 1,50,000<\/span><\/td>\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 3,12,000<\/span><\/td>\n8%<\/span><\/td>\n\u00a0\u00a0\u00a0 24,960<\/span><\/td>\n\u00a0\u00a0\u00a0 3,36,960<\/span><\/td>\n<\/tr>\n
      3<\/span><\/td>\n2020<\/span><\/td>\n\u00a0\u00a0\u00a0\u00a0\u00a0 1,50,000<\/span><\/td>\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 4,86,960<\/span><\/td>\n8%<\/span><\/td>\n\u00a0\u00a0\u00a0 38,957<\/span><\/td>\n\u00a0\u00a0\u00a0 5,25,917<\/span><\/td>\n<\/tr>\n
      4<\/span><\/td>\n2021<\/span><\/td>\n\u00a0\u00a0\u00a0\u00a0\u00a0 1,50,000<\/span><\/td>\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 6,75,917<\/span><\/td>\n8%<\/span><\/td>\n\u00a0\u00a0\u00a0 54,073<\/span><\/td>\n\u00a0\u00a0\u00a0 7,29,990<\/span><\/td>\n<\/tr>\n
      5<\/span><\/td>\n2022<\/span><\/td>\n\u00a0\u00a0\u00a0\u00a0\u00a0 1,50,000<\/span><\/td>\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 8,79,990<\/span><\/td>\n8%<\/span><\/td>\n\u00a0\u00a0\u00a0 70,399<\/span><\/td>\n\u00a0\u00a0\u00a0 9,50,389<\/span><\/td>\n<\/tr>\n
      6<\/span><\/td>\n2023<\/span><\/td>\n\u00a0\u00a0\u00a0\u00a0\u00a0 1,50,000<\/span><\/td>\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 11,00,389<\/span><\/td>\n8%<\/span><\/td>\n\u00a0\u00a0\u00a0 88,031<\/span><\/td>\n\u00a0\u00a0 11,88,421<\/span><\/td>\n<\/tr>\n
      7<\/span><\/td>\n2024<\/span><\/td>\n\u00a0\u00a0\u00a0\u00a0\u00a0 1,50,000<\/span><\/td>\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 13,38,421<\/span><\/td>\n8%<\/span><\/td>\n\u00a01,07,074<\/span><\/td>\n\u00a0\u00a0 14,45,494<\/span><\/td>\n<\/tr>\n
      8<\/span><\/td>\n2025<\/span><\/td>\n\u00a0\u00a0\u00a0\u00a0\u00a0 1,50,000<\/span><\/td>\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 15,95,494<\/span><\/td>\n8%<\/span><\/td>\n\u00a01,27,640<\/span><\/td>\n\u00a0\u00a0 17,23,134<\/span><\/td>\n<\/tr>\n
      9<\/span><\/td>\n2026<\/span><\/td>\n\u00a0\u00a0\u00a0\u00a0\u00a0 1,50,000<\/span><\/td>\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 18,73,134<\/span><\/td>\n8%<\/span><\/td>\n\u00a01,49,851<\/span><\/td>\n\u00a0\u00a0 20,22,984<\/span><\/td>\n<\/tr>\n
      10<\/span><\/td>\n2027<\/span><\/td>\n\u00a0\u00a0\u00a0\u00a0\u00a0 1,50,000<\/span><\/td>\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 21,72,984<\/span><\/td>\n8%<\/span><\/td>\n\u00a01,73,839<\/span><\/td>\n\u00a0\u00a0 23,46,823<\/span><\/td>\n<\/tr>\n
      11<\/span><\/td>\n2028<\/span><\/td>\n\u00a0\u00a0\u00a0\u00a0\u00a0 1,50,000<\/span><\/td>\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 24,96,823<\/span><\/td>\n8%<\/span><\/td>\n\u00a01,99,746<\/span><\/td>\n\u00a0\u00a0 26,96,569<\/span><\/td>\n<\/tr>\n
      12<\/span><\/td>\n2029<\/span><\/td>\n\u00a0\u00a0\u00a0\u00a0\u00a0 1,50,000<\/span><\/td>\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 28,46,569<\/span><\/td>\n8%<\/span><\/td>\n\u00a02,27,726<\/span><\/td>\n\u00a0\u00a0 30,74,294<\/span><\/td>\n<\/tr>\n
      13<\/span><\/td>\n2030<\/span><\/td>\n\u00a0\u00a0\u00a0\u00a0\u00a0 1,50,000<\/span><\/td>\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 32,24,294<\/span><\/td>\n8%<\/span><\/td>\n\u00a02,57,944<\/span><\/td>\n\u00a0\u00a0 34,82,238<\/span><\/td>\n<\/tr>\n
      14<\/span><\/td>\n2031<\/span><\/td>\n\u00a0\u00a0\u00a0\u00a0\u00a0 1,50,000<\/span><\/td>\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 36,32,238<\/span><\/td>\n8%<\/span><\/td>\n\u00a02,90,579<\/span><\/td>\n\u00a0\u00a0 39,22,817<\/span><\/td>\n<\/tr>\n
      15<\/span><\/td>\n2032<\/span><\/td>\n\u00a0\u00a0\u00a0\u00a0\u00a0 1,50,000<\/span><\/td>\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 40,72,817<\/span><\/td>\n8%<\/span><\/td>\n\u00a03,25,825<\/span><\/td>\n\u00a0\u00a0 43,98,642<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

      From the tenth year, the interest overtakes the yearly contribution.\u00a0 In the final balance at the end of 15 years, almost half is contributed by accumulated interest.\u00a0\u00a0 If you extend the account for 5 years and continue contributing, the interest at the end of 20 years would be almost 1.5 times that of the principal – 44 lacs of interest and 30 lacs of principal. \u00a0<\/span><\/p>\n

      In a thread in Quora, a prolific author posted a screenshot of his PPF account. You can read the thread to get a real-life example.\u00a0 Why my father always recommend to invest in PPF?<\/a> (Interestingly, all the people responding to the question agree with the father!)\u00a0 Even without the initial 80(c) rebate, PPF is still a great debt product. So the prudent thing would be to invest the maximum allowable amount every year, even if it is outside the 80(c) limit. <\/span><\/p>\n

      Employee Provident Fund – Just stop abusing it<\/span><\/h3>\n

      EPF is even better than PPF, if you view it as a debt instrument.<\/span><\/p>\n