PPF Vs Tax Saving Mutual funds for 2012-13

POSTED BY Ram Mohan ON April 3, 2012 4:03 pm COMMENTS (20)

All:

I’ve been reading a lot about how exemption on tax saving mutual funds have been extended for 1 more year and how it is a good investment.

Now, I have 8,333 p.m ready to invest from this month onwards (total 1 lac p.a). I don’t have a PPF account yet, so I have a choice between 8,333 PM in PPF or invest the same in some tax saving mutual funds and then start PPF from next year onwards.

What do you experts suggest? I’m 32 and this is for my retirement fund. I’m willing to wait for 15 – 20 years in both cases of investment.

Thanks,

Ram

20 replies on this article “PPF Vs Tax Saving Mutual funds for 2012-13”

  1. Tejaswi says:

    Yes…I invest 35K in MF as SIP, 5K in RD and 8K in EPF (including 4K from employer)…every month

    So Debt portion (5K+8K) = 27%
    Equity portion (35K) = 73%

    So I guess investing in PPF may not be necessary at this point. My age is 32 and have not invested in Tax saving MFs till date. I fall in 20% bracket.
    I also have a choice to part pay my home loan to claim 80C benefits but I think Tax saving MF would be beneficial in the long term.

    What are your thoughts?

  2. Tejaswi says:

    Hi Ashal,

    When I compare my contribution to EPF (including employer contribution), the amount would come more than 20% of the Equity being invested. So I am not sure if I still need to contribute to PPF at this stage. Kindly let me know if I am missing something here.

    Also, you mentioned about govt. not able to touch the PPF account in case one being insolvent. Would this be the same in case of EPF as well?

    1. Dear Tejaswi, you mean to say that as on date your Debt contribution in the form of PF (your + employer’s contribution) is around 25% & Eq. part is 75%?

      Yes the same insolvency cover is available to PF also.

      Thanks

      Ashal

  3. rmohan80@gmail.com says:

    All:

    Thank you for your wonderful answers and suggestions. I did some calculations and found out that I actually have to invest only 65,000 this year on 80C. Reason being I have some insurance for 10K and an ULIP for 25k (which I’ll stop after this year since it’s the 5th year).

    So I think i’ll invest maybe around 35K in ELSS and rest in PPF. Because of all this calculation, I’ll end up having around 38K left to invest which I’ll probably invest in some debt funds to shore up my debt allocation.

    Hopefully, this will help me take care of all the different things that needs to be done…Phew, investing in right manner requires lot of planning and thought 😉

    1. Dear Ram, for that ELSS thing, if possible to you, you may use Debt fund – STP – Eq. fund (ELSS in this case) on 500 Rs. weekly basis. To earn slightly better return.

      Thanks

      Ashal

  4. Dear Ram, based upon your asset allocation I w’d ask you invest anywhere from 20 to 50K in PPF or even more. Remaining should be in ELSS for this year. Merits & demerits of PPF & ELSS are already discussed by others but one important thing missed by all. In case you become insolvent/bankrupt down the line after few years, all other investments of your’s can be attached with the court orders but PPF in your case & PF for others where applicable are the only investments which can’t attached or taken over even with the court orders. I do not know is this a good reason for you & others or not to have a portion of their investments in PPF/PF.

    Thanks

  5. BanyanFA says:

    You must on a minimum have a PPF account where you can push around 1K per month. This would serve your debt component of your portfolio. If you are 32, then it is an excellent opportunity to invest via ELSS to save tax. Unfortunately ELSS may end from next year.

    Regards
    BFA

    1. Dear Banyan & other friends, please do not write obituary of ELSS now. It’s still one year for the parliament to take any decision on DTC & related things. Actually, it’s not even 1Y, just 3 months or so to pass the DTC bill in monsoon session. The reason is CBDT as well as Income Tax deptt. ‘ll require at least 6 months’ time to become ready for changes in their own soft-wares, workings, procedures……. in DTC.

      Thanks

      Ashal

  6. With 20 years time frame, i would have invested my money in MF. I agree timing the market is bad, yet i would be little cautious when market are trading extremely high.

    Here is my two cents. i would have PPF. Any time i feel market is over valued, i would flood my money to PPF else it will go into MF.

  7. Tejaswi says:

    Hi JGMM,

    While I agree that PPF/debt should be a part of a portfolio but I would like to differ on choosing PPF over Tax saving funds if the purpose is only to save Tax. Over 15 years period, Tax saving fund will outperform PPF. But as you said there is always a possibility that people may run away if markets are low over a period of time.

    Moreover, sufficient amount is already being contributed into EPF.

    Thanks Tejaswi

  8. Asset allocation is the single most contributor for wealth generation – this is not an understatement. Not even picking the right security – just Asset allocation. Check http://wp.me/p1Y418-24.

    Everyone right from someone starting to earn at 21 or in mid career at 45 or retiring at 60 MUST HAVE Debt in their Portfolio.

    Take this – A Portfolio that doubles gradually over 4 years (CAGR of 18%) when struck for 2 consecutive years with a Negative 20% return will almost fall to a cumulative CAGR of 3.65% over 6 years.

    Year Start Rate of return End corpus CAGR
    1 100 18% 118 18.00%
    2 118 18% 139.24 18.00%
    3 139.24 18% 164.3032 18.00%
    4 164.3032 18% 193.877776 18.00%
    5 193.877776 -20% 155.1022208 9.18%
    6 155.1022208 -20% 124.0817766 3.66%

    At different points in time different people will appear smarter. For years 1 through 4 the MF investor will appear smarter. Y5 is even – MF investor is still ahead but he is already confused. At the end of Year 6 it appears that the Pure Debt investor appears smarter (They lost out on inflation anyway).

    If someone continues their SIP through thick and thin beyond year 6 it is perhaps likely the MF investor will come out smarter again sometime in the future years (They will go to oblivion yet again and emerge yet again though).

    HOWEVER let’s be clear – A majority of us don’t have the temperament to bear this brutal fall for 2 years that will just swallow the painstakingly grown corpus over years 1 thru 4. It is easier to stay from the sidelines today and say we will continue the SIP etc. but when reality strikes it is different. A Portfolio balanced every 12-18 months will cushion the overall impact (the link posted above also confirms the same). Over a very long period an Investor that does Asset allocation comes out way ahead of a Pure Debt and Pure equity investor because the former will lose out on inflation and the latter will lose out due to lack of temperament. [Temperament is not dependent on earning capacity at all.].

    If people would have held on to equity permanently a good number of them in the developed world would have been millionaires by now given the higher participation and exposure to equity. They are not.

    @rmohan80 – I would strongly recommend a mix of Debt and Equity for you with about 25% exposure to Debt (This will include everything Debt related – FDs, RDs, All Bonds, Debt funds, Liquid funds, EPF, PPF and SB account etc) and the rest of them can be in Mutual Funds.

    ========

    I know there will be counter arguments asking me to go and check the Moneycontrol/VRO site for CAGR of various schemes. I know what they are. On hindsight everything seems easier. If I ask a class of Jago Investors of 100 people in this forum how many continued SIPs from Jan 2007 to date (holding through the 2008 melt down) I will barely see 3 hands possibly (of course this is a made up random number). The remaining 97 will be classified as:
    17 – Stopped MF SIPs forever
    10 – Restarted SIP after marked bounced back in 2010. I got back the belief in the market! (After failing to do a SIP from Jan 2008 to Jan 2010 at a Sensex level of 7000 – 12000 for most of them time)
    70 – I did not even know SIP was existing until I came to this forum some few days/weeks/months ago.

    Thus a miniscule part of the population alone can withstand mad market falls – they should have heavy exposure to equity and will be THE WINNERS over a long time frame. But for the rest of us mere mortals a continued Asset allocation alone will do the trick.

    [The intent is not to get personal but to highlight the benefits of Asset allocation]

    1. BanyanFA says:

      Hi JustGrow
      I might be one of your 3 show of hands who has been investing into SIPs right from 2004 🙂

      Regards
      BFA

  9. TheZionView says:

    Dont wait for age 45 you can start PPF now and keep investing 500(minimum ) into it every year.So when your near retirement you would have already finished the 15 year lock in and you will have a shorter period of 5 year lockin and you will have ability to withdraw good amount.

    I have a PPF opened couple of years back.I intend to increase the investment into it slowly over the years.

    Yes there are risks of got extending the lock in period and paying low interest. But having a EEE investment with short lockin(5 years after the 15 year period ) is good.I also assume this would always have higher interest than NSC like of debt

  10. Ramprakash says:

    Pension scheme (sec 80C)
    NSC (sec 80C)
    Public Provident Fund (sec 80C)
    Employees Provident Fund & Voluntary PF (sec 80C)
    Children’s Education Tuition Fees (sec 80C)
    Housing loan principal repayment (sec 80C)
    Insurance premium & others (MF, ULIP, FD, etc.) (sec 80C) [Life insurance policies (except pension plans) issued after April 1, 2012, have to offer risk protection of at least 10 times the annual premium of the policy to be eligible for the tax benefit under section 80C and section 10(10D) of income tax act 1961.]

  11. rmohan80@gmail.com says:

    @Ramesh and @Manish

    Thanks for your suggestions. A follow up question, So what other tax saving options do I have once the tax saving mutual funds are done in 2013? My company does not have PF so I need to invest fully 100,000 in 80C

    Thanks,

    Ram

    1. Ramesh says:

      When I will find them, I will convey the information here.

      Ramesh

  12. Ram

    With 15-20 yrs of view .. i think tax saving mutual funds are the best investments . Even with the short term volatilities coming in , the over all long term returns would be good one . Go for HDFC Tax Saver or some other fund

    I think you can open a PPF account, but at this stage do not invest heavily into it , just keep a minimum 500 to keep it alive

    Manish

  13. Ramesh says:

    In my view, do not start PPF if you are below 45 years.

    1. rmohan80@gmail.com says:

      Hi Ramesh,

      Can you expand on your views? Why do you say a person of age 32 should not start PPF account?

      Thanks,

      Ram

      1. Ramesh says:

        At 32, you are looking at retirement around 60 years (+/- some years). Using a debt portfolio for a such a long period of time (28 years is mightly long) does not help you against inflation.

        Moreover, this debt option has other shortcomings:
        1. The duration of lock-in and interest rate can be changed by the govt of the day.
        2. You do not have good withdrawal options during the locked-in period.

        I suggested at 45 years, since then the 15 year period lock-in will come into effect to around 60 years (Of course, you can extend it, afterwards).

        So, if you want to have a debt option, go with an option which can give you liquidity if there is need for that.

        Ramesh

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