Returns on PPF

In 2005, I joined a company that did not offer any kind of PF deduction, while my previous employer offered one. In order to maintain some sort of long term contribution I decided to start my own PF investment through India's Public Provident Fund Scheme. 

That was more than 15 years ago. 15 years is how long you need to maintain it for a minimum before you can close it without a penalty. So I closed it this year, and withdrew the money this week.

How did the investment perform?

In INR terms, it returns 7.79% IRR over 15 years.  

That kind of return over 15 years for a fixed asset isn't great, but it isn't terrible either. However, since I mostly measure investment returns in global currencies these days, I decided to figure out how it fared in GBP, USD and SGD terms.

I converted all my transactions into the relevant currencies as of the date of transaction using historical forex rates, and calculated the effective IRR in each currency.

  • In GBP, the returns were 6.69%
  • In USD, the returns were 4.13%
  • In SGD, the returns were 4.68%
These are very good returns for fixed income product in these currencies. For instance, it would have been almost impossible to source a 4.68% return Government backed fixed-income asset in Singapore in the intervening period. Same in UK. I suspect if you had timed it well, you could have probably bought some US treasuries for that sort of yield, but you needed to time it right and buy in big lots. 

Overall this is good.

(Note: Just to be clear, this data doesn't indicate what might  happen in the next 15 years, as there is interest rate risk, currency risk etc that might turn out to be very different. In fact, it is not even representative of what might have happened in the same 15 years with a different set of cash flows.)

What's next for this money?

This PPF fund was one of my very few fixed income assets and something I had cherished and built up over the years. I wanted to make sure I deploy it for something equally good. Given the recent increase in interest rate hikes and my oncoming renewal of mortgage in 2 years time, I decided to put the money in reducing my outstanding principal on my mortgage. 

Raw data in case anyone wants to scrutinise.


k3w13r said…
Hi Shreeni,

Great post. I liked that you compared the returns in global currencies, something that I always thought about, but saw it only now in action.
My question - If there is no compulsion to withdraw funds early, do you think if it would be wise to continue PPF beyond 15 years and let compounding do its job? I do see the risks in the form of reduced ppf rates and new restrictions every year to make investing in it harder, but I still feel its a better form of govt backed security in the long run. There is a likelihood that the govt puts even more restrictions on bigger withdrawals.

Shreeni said…
You are right that it being a government backed security, it is a compelling compounding option to just let continue.

For me, there were 3 reasons (risks so to say) that combined to make me want to take my money out:

1. Interest rate risk - interest rates may not sustain where they have been historically
2. Exchange rate risk - while the data in this post indicates that this was a good investment in foreign currency terms, Indian Rupee has over the long run lost value against a basket of global currencies. Taken at any other time, this analysis could have yielded a very different result.
3. Repatriation risk - if you plan to live abroad in the long run, you want your money outside of India as movement of global currencies is generally far less restrictive than Indian investments in INR. Even if you plan to go back to India, leaving a part of your wealth outside of India for a future day use (children’s education for instance), is probably a good idea.

Hope this gives you some direction with your own decision.
k3w13r said…
Thank you, it makes sense. I still have some years left for its maturity, and I will keep those pointers in mind when I decide.

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