PPF vs Mutual Funds for Child's Education: An Investor's Dilemma

Going with your elaborated advice , one more confusion need clarification from you please. I'm investing in PPF for last 8/9 years with goal of child education having time horizon of another 5/6 years . Inflation of cost of education is 8/9% in India, if I'm correct . It is also learned from you , beating inflation with PPF return is not possible . In such scenario , I'm contemplating with the idea of PPF continuation or not . Following few alternatives I'm thinking of , Please advise . 1. Discontinue PPF contribution from this years onwards and start mutual fund SIP same amount ( 12500/month). Let accumulated corpus in PPF grow. If yes, kindly guide which type of MF is better for 5/6 years in hand ? 2. Discontinue PPF contribution from this years onwards and start NPS Vatsalya scheme with same amount ( lumpsum 150000 or SIP 12500 ) . Let accumulated corpus in PPF grow. 3. Diversify Rs.50000 each in PPF, NPS Vatsalya and MF 4. Continue with PPF as it is . Or any other better guidance to fulfill my goal in the said time frame .

Ans: Hello;

Continue with your PPF investments as usual 1.5 L each FY.

You are invested in it already for 8-9 years so no point getting into its pro's and con's at this juncture.

It's a EEE social security product and has its own benefits.

Don't get swayed by any other market noise. Stay the course.

Best wishes;

Ans: As a 36-year-old couple living in Indore with two young children aged 7 and 5, planning for their education and your retirement is essential. You have already invested Rs 10 lakh in mutual funds, which is a good start, but deciding whether to continue investing in equity or shift towards safer options like PPF (Public Provident Fund) depends on various factors like risk appetite, investment goals, and time horizons.
Step 1: Define Your Financial Goals
When it comes to financial planning, it’s crucial to outline specific goals:
1. Children’s Education: The cost of higher education, both in India and abroad, has been rising significantly. Assuming that your children will start higher education in around 10-12 years, you need to estimate the costs accordingly. For example, education in India for courses like engineering or medicine can cost Rs 20-40 lakh, while overseas education can range from Rs 1-2 crore, depending on the country and course.
2. Retirement: Assuming you and your husband plan to retire around the age of 60, you have roughly 24 years to build your retirement corpus. With increasing life expectancy and inflation, it’s important to accumulate a large enough corpus to sustain your lifestyle for at least 20-30 years post-retirement. Typically, you would need around 70-80% of your pre-retirement income to maintain your lifestyle.
Step 2: Understanding the Role of Equity in Your Portfolio
Equity Mutual Funds are an excellent option for long-term wealth creation due to their potential for high returns. Historically, equity has outperformed other asset classes, especially over periods of 10-15 years or more. However, it is also more volatile in the short term.
Given that you have a long-term horizon for both your children’s education and retirement, staying invested in equities can help you take advantage of market growth. The power of compounding works best when you give your investments time to grow, making equities a good choice for long-term goals.
Key Benefits of Equity Mutual Funds:
1. Higher Returns: Over the long term, equity funds have the potential to deliver 10-12% returns annually, which can significantly outpace inflation.
2. Flexibility: You can choose between various types of equity funds, such as large-cap, mid-cap, and small-cap funds, based on your risk tolerance.
3. Tax Efficiency: Long-term capital gains (LTCG) tax on equity mutual funds is relatively lower (10% on gains exceeding Rs 1 lakh) compared to other investment vehicles.
However, if you’re uncomfortable with market volatility, it might make sense to diversify your portfolio to include less risky assets like debt funds, PPF, or fixed deposits.
Step 3: Assessing the Benefits of PPF for Security
The Public Provident Fund (PPF) is a popular investment option in India due to its safety and tax benefits. It offers a guaranteed return, currently around 7-8%, and is backed by the government. Additionally, it comes with tax benefits under Section 80C of the Income Tax Act, making it an attractive option for risk-averse investors.
Key Benefits of PPF:
1. Capital Safety: Since PPF is a government-backed scheme, there is zero risk of capital loss, making it a secure option.
2. Tax-Free Returns: The interest earned on PPF is tax-free, and the contributions are eligible for deductions under Section 80C.
3. Guaranteed Returns: Though the returns are lower than equity, the consistency and security it offers can be beneficial, especially in volatile market conditions.
Step 4: Balancing Equity and PPF
To determine whether you should continue investing in equity or shift part of your funds to PPF, you need to evaluate your risk appetite and the nature of your financial goals:
1. Children’s Education: Since you have 10-12 years before your children’s higher education, you can continue to invest in equity mutual funds for at least the next 5-7 years. Equity is suitable for wealth accumulation over the long term, and you can shift towards safer debt instruments or PPF closer to the time when you need the money, reducing exposure to market volatility.
A balanced approach could be to maintain around 70-80% of your investment in equity for the next few years and slowly move part of the corpus into safer options like debt funds or PPF once your children approach their teenage years.
2. Retirement: Since your retirement is about 24 years away, you can afford to stay heavily invested in equity for the long term. However, as you approach your retirement, say within the last 10 years, you can begin gradually moving your funds into safer instruments like PPF or debt mutual funds to protect your capital from short-term market volatility.
At this stage, maintaining a balanced portfolio with around 60-70% in equity and 30-40% in debt/PPF can provide you with both growth and stability. As you get closer to retirement, this ratio can be adjusted to reduce risk.
Step 5: The Case for a Diversified Portfolio
Rather than choosing between equity and PPF, the best approach would be to diversify your investments. A well-diversified portfolio that includes equity mutual funds for growth and PPF or debt instruments for security can help you achieve both your short-term and long-term goals.
1. Equity Mutual Funds: Continue your equity investments, especially in large-cap or multi-cap funds, which provide relatively stable growth.
2. PPF or Debt Funds: You can start allocating a portion of your savings to PPF for security and tax-free returns. Additionally, consider debt mutual funds, which offer better liquidity compared to PPF and provide moderate returns.
Conclusion: A Balanced Approach
Given your long-term goals for both education and retirement, continuing with equity investments is advisable due to their high growth potential. However, as you approach the time when you need the funds, shifting a portion of your portfolio to secure options like PPF can reduce the risk. A balanced portfolio, with a mix of equity for growth and PPF for security, will help you achieve your financial goals while managing risks effectively.