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Should you stop investing in PPF?
It's true; the interest on PPF has been lowered to 7.9%.
It seems unfair, doesn't it?
While depositors are earning lower interest on almost all deposits held with banks and under various Government schemes, the banks will earn higher interest for doing nothing. On the contrary, these banks don't pass on the benefits to borrowers and depositors. On the contrary, they will cry foul due to their stressed balance sheets; for which depositors are not responsible for sure.
At the first bi-monthly monetary policy FY 2017-18, the RBI hiked the reverse repo rate from 5.75% to 6.00%. While it left repo rates unchanged. In other words, it offered banks an opportunity to borrow cheap money from the market and park it at 6% with the RBI. Here's how it works, the RBI pays banks an interest at the reverse repo rate for their surpluses parked with it.
Now you'd probably ask, what does this have to do with your PPF investments?
Well, do you know why the Government started reshuffling the interest on your PPF investments so often? Because banks always complained that, Small Savings Schemes (SSS) such as PPF, make bank deposits unattractive as they offer higher interest rates.
The banks were reluctant to lend to borrowers, citing the problems of asset quality. Over the last 2 years, the RBI has lowered the policy rates by 175 bps, but most of the banks have passed only about 85 to 95 bps to their borrowers. But, the Government has been swaying to the tune of banks and has been lowering the interest rates on SSS at regular intervals.
Is this a real transmission?
Rather, in absence of any formidable social security scheme, the interest on PPF shouldn't be lowered especially at a time when banks have excess cash to an extent that, RBI had to hike the reverse repo rate. The credit growth has touched its lowest level, in the last decade, during the fortnight that ended March 03, 2017. This is even more painful. It means, while there are many individual borrowers are being denied loans every day for the reason of lack of creditworthiness, the Government and banks are trying to protect their pockets.
On one hand, farm loan waivers are spoiling the credit discipline and setting the wrong precedents, and hence, lowering interest rates on PPF is reasoned as policy discipline.
Now the question is, has PPF become a redundant investment?
The answer is, "No".
Not yet, it hasn't. It pays you compounded annual interest and helps you avail the tax benefits under section 80C. Moreover, you don't have to any tax on the interest and maturity proceeds are tax free too.
Nonetheless, you shouldn't entirely depend on PPF for your retirement planning and for tax saving purpose as well. You should look at other tax savings avenues such as Equity Linked Savings Schemes (ELSS) as well which help you not only save taxes but also generate wealth.
If you haven't started working on your retirement plan, you should embark on it, before it gets too late. A Certified Financial Guardian, who is mark of trust and respect, can help you plan for all your financial goals.
PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.
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