PPF: Before investing your hard-earned money, consider these 5 things...

Whenever we think of safe and tax-efficient investments, the Public Provident Fund (PPF) is one of the first things that comes to mind. Due to its government guarantee, tax-free interest, and no tax on maturity (EEE status), it is very popular among salaried and small investors. But have you ever considered the other side of the coin?

Like every investment, PPF also has some drawbacks that people often overlook. Investing in PPF based solely on its benefits can prove to be a loss-making deal in the long run. Therefore, it's crucial to understand these drawbacks before locking your hard-earned money for 15 years.

1. Biggest Drawback: Long 15-Year Lock-In Period

You can indeed accumulate substantial wealth through PPF over a long period of time. However, its biggest drawback is the long 15-year lock-in period. Your money is locked in this scheme for the entire 15 years. You cannot close it before maturity (except under certain circumstances). In today's rapidly changing times, 15 years is a long time. Your financial goals may change during this time, and you may need money for an emergency, and this clause can become a major obstacle.

2. Interest rates are not fixed; they can also decrease.

If you invest in an FD (Fixed Deposit) or any other scheme for 5 or 10 years, even if the interest rate changes, it does not affect your investment. However, this is not the case with PPF. The government reviews its interest rate every quarter (three months).

While it is still better than many bank FDs, there is no guarantee that it will remain the same forever. In the last few years, PPF interest rates have dropped from 12% to 7.1%. If interest rates decrease further in the future, your expected returns could be significantly lower.

3. Poor Inflation Management
PPF is a safe investment, but it's not necessarily the best way to create wealth. Inflation significantly reduces your returns over the long term. Suppose PPF offers a 7% return and inflation is 6%, your real return is only 1%.

On the other hand, Equity Linked Savings Schemes (ELSS) or good mutual funds can easily beat inflation by providing much better returns over the long term.

4. Investment Limit: Only ₹1.5 Lakh Annually
You can deposit a maximum of ₹1.5 Lakh in a PPF account in a financial year. This limit is too low for those who earn more and want to invest more. If you want to build a large corpus for your retirement or any other major goal, relying solely on PPF will not be enough. You'll also need to include other investment options in your portfolio, such as mutual funds and VPF (Voluntary Provident Fund).

5. No Joint Account Option
Unlike other schemes, PPF doesn't offer the option to open a joint account. However, you can appoint a nominee. Furthermore, a person can open only one PPF account. Therefore, before investing in PPF, it's important to consider its advantages as well as its drawbacks. This will help you make a more informed decision that aligns with your financial goals.

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