Should I Continue Investing In Equity Or Shift To PPF For My Children's Education And Retirement?

I’m 36 with two children aged 7 and 5, living in Indore. My husband and I want to save for their education and our retirement. We’ve already invested Rs 10 lakh in mutual funds. Should we continue investing in equity or shift some towards PPF for better security?

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.

Ans: Assessing Your Current Financial Position
You and your family have done an excellent job managing your finances. With Rs 1.3 crores in equity, Rs 2.5 crores in real estate, Rs 20 lakhs in gold, and Rs 75 lakhs in debt funds, your portfolio reflects a balanced approach to wealth creation and asset protection.

Your PPF accounts are maturing next year, holding a total corpus of Rs 33 lakhs between them. This presents an interesting opportunity to reconsider your options, especially since your next significant financial goal—your daughter’s college education—is still six years away.

It is also wise to recognize that India is a growing economy, and equity markets have the potential to deliver higher returns over the long term. However, this comes with volatility, while PPF provides safety but at lower returns. Let’s take a deeper look at whether you should continue contributing to your PPF accounts or reallocate some of that corpus into equity-based investments.

Understanding the Role of PPF in Your Portfolio
The Public Provident Fund (PPF) has long been a preferred investment vehicle for many Indian investors, including yourself, due to its risk-free nature and the fact that it offers tax-free returns. With a lock-in period of 15 years and the possibility of extending the term in blocks of five years, it is an ideal tool for long-term savings. As of now, the PPF interest rate stands around 7-8%, but there are concerns that it could remain stagnant or possibly decrease in the future.

Your total PPF corpus of Rs 33 lakhs (Rs 22 lakhs in one account and Rs 11 lakhs in another) reflects the stability and disciplined approach you’ve had toward growing your wealth through safe investments. The tax benefits associated with PPF also make it an attractive option for many. However, as you near the maturity of these accounts, it is prudent to evaluate whether this vehicle continues to serve your long-term financial objectives as effectively as before.

Given that you don't have any immediate liquidity needs, this is the perfect time to review whether PPF remains your best option, particularly when considering alternative investment avenues such as equity mutual funds.

Considering Equity for Long-Term Growth
Equity investments have a proven track record of generating substantial returns over the long term. Your existing Rs 1.3 crore equity portfolio indicates that you are already familiar with the benefits of equity. The stock market can generate wealth, particularly in growing economies like India. Over a 5-10 year period, equity markets tend to deliver higher returns compared to traditional savings vehicles such as PPF, provided you can stomach the associated market volatility.

One of the key considerations in your case is that your daughter's education is approximately six years away, a reasonably long-term goal. Equity investments generally do well over time, but there can be short-term market corrections or volatility, which you must be prepared for. Equity may help grow your wealth significantly, but the risk is always that market conditions could turn unfavorable at the time when you need to liquidate your investments. Hence, any decision to increase your equity exposure should be balanced against your overall risk tolerance.

While equity has its risks, it’s an option worth considering for long-term goals like your daughter’s education, especially since you already have a strong portfolio and other stable assets. You should aim for a well-balanced portfolio that delivers growth without exposing you to excessive risk.

The Risk-Return Balance
Your current portfolio shows that you have taken a relatively diversified approach by holding significant portions in real estate (Rs 2.5 crores), equity (Rs 1.3 crores), gold (Rs 20 lakhs), and debt funds including PPF (Rs 75 lakhs). While real estate and gold offer some level of safety and appreciation potential, they are often less liquid than other forms of investments and can be challenging to sell quickly. Gold has traditionally been a hedge against inflation but may not offer the kind of returns that equity can deliver.

A key question you need to ask is how much more risk you are willing to take at this stage, given that you have a significant portion of your investments in relatively stable asset classes. Since equity markets are volatile but promise higher returns, this could be an excellent time to consider shifting a portion of your maturing PPF corpus into equity, provided you’re comfortable with the risk.

One strategy to reduce the risk of equity market fluctuations is to invest systematically, either through Systematic Transfer Plans (STPs) or Systematic Investment Plans (SIPs) in mutual funds. This way, you can gradually shift your funds from PPF into equity mutual funds, allowing you to benefit from rupee-cost averaging and reduce the impact of market volatility.

Should You Continue Contributing to PPF?
Given that the PPF offers a guaranteed, risk-free return and tax-free income, there’s a strong argument for continuing your yearly contributions. The principal is secure, and even though the interest rates may decrease, the returns are still risk-free. This can act as a safety net for your daughter’s education.

However, there’s also the case for reallocating part of this corpus into equity, especially considering the growing Indian economy and potential higher returns from the stock market. If you reduce your annual contributions to PPF, you can allocate more towards higher-return investment avenues such as equity mutual funds. The decision ultimately boils down to your risk tolerance and future income needs.

If you decide to reduce your PPF contributions, ensure you have enough funds in secure, low-risk options to meet your liquidity needs without having to sell equity at a bad time in the market.

Why Equity Mutual Funds Are a Better Option than Index Funds
While both equity mutual funds and index funds invest in equities, actively managed equity mutual funds offer several advantages over passive index funds. Actively managed funds are managed by fund managers who actively adjust the fund’s portfolio to take advantage of market opportunities and manage risks.

Here’s why actively managed funds might be a better option for you:

Higher Potential Returns: Actively managed funds can outperform index funds by identifying investment opportunities in growing sectors. Fund managers constantly monitor the market, which can lead to higher returns than passively following an index.

Risk Management: Professional fund managers actively manage risk by adjusting the portfolio based on market conditions. This can provide better downside protection during volatile times, making it a safer choice for conservative investors who still want exposure to equity markets.

Customization: Actively managed funds can be tailored to your financial goals and risk profile. If you need a fund focused on a particular sector or with a balanced risk approach, your Certified Financial Planner can recommend suitable funds.

On the other hand, index funds simply track the performance of an index, which can be limiting during volatile market conditions. They offer no protection against downturns and might underperform in certain market conditions. Additionally, the returns of index funds are often lower than those of actively managed funds.

Why Investing Through a Mutual Fund Distributor is Preferable to Direct Funds
You might have heard about direct funds, which allow investors to bypass intermediaries and invest directly with the mutual fund house. While direct funds come with lower expense ratios, they also come with certain disadvantages, especially if you’re not an experienced investor or don’t have the time to manage your investments.

Here’s why investing through a Mutual Fund Distributor (MFD) who holds a Certified Financial Planner (CFP) credential is a better option:

Expert Advice: An MFD with CFP certification can offer you personalized advice and help you choose the right funds for your financial goals. They can monitor your portfolio and suggest timely changes based on market conditions and your changing life goals.

Convenience: Managing mutual funds requires time, research, and effort. A financial professional can handle these tasks for you, ensuring that your portfolio stays aligned with your objectives.

Better Risk Management: A CFP-certified MFD can advise you on how to balance risk and return, ensuring that your portfolio isn’t too aggressive or too conservative. This kind of personalized service is invaluable when planning for long-term goals like your daughter’s education.

Taxation Considerations
When deciding whether to continue with PPF or move funds into equity, it’s essential to factor in the tax implications.

PPF: As mentioned earlier, the returns on PPF are entirely tax-free. This is a significant benefit that you’ll lose if you move funds into taxable instruments like equity mutual funds.

Equity Mutual Funds: Long-term capital gains (LTCG) from equity mutual funds are taxed at 12.5% on gains above Rs 1.25 lakhs annually. This is relatively low compared to other forms of taxable income, but you should still factor it into your decision-making process.

Debt Funds: If you’re considering debt funds as a lower-risk alternative to PPF, keep in mind that short-term capital gains (STCG) from debt funds are taxed as per your income tax slab, while LTCG is taxed at 20% after indexation.

By balancing PPF with equity mutual funds, you can optimize your tax liability while aiming for higher returns.

Gold and Debt Funds in Your Portfolio
You already hold Rs 20 lakhs in gold and Rs 75 lakhs in debt funds, including PPF, Sukanya Samriddhi Yojana (SSY), and NPS. These assets provide diversification and stability to your portfolio. Gold, in particular, acts as a hedge against inflation, while debt funds offer steady but moderate returns.

However, gold and debt funds are not likely to grow at the same pace as equity. Hence, you don’t need to increase your exposure to these assets. Instead, focus on maintaining your current allocation in gold and debt funds for safety, while growing your equity portfolio for higher long-term gains.

Final Insights
In conclusion, while the PPF offers safety and tax-free returns, moving a portion of your maturing corpus into equity mutual funds could potentially provide higher returns, especially for long-term goals such as your daughter’s education. However, be mindful of your risk tolerance and consider systematic investments in equity through SIPs or STPs to mitigate volatility. It’s crucial to strike the right balance between safety and growth to achieve your financial goals.

Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment