Is PPF Too Good To Be True ?

Hi Folks,

Every time I talk to my brother we get into high-frequency conversations and talk about a lot of stuffs including money. Biologically I'm elder but if put in simple terms; I'm the muscles and he's be the brains. Our duo has been very remarkable from the very beginning.

Pranjal is an inventor naturally; since he was in 3rd grade, he made astonishing discoveries & invented countably many tools which came handy in day to day life and became popular in our vicinity and school. He used to invent things (the prototypes) and I used to come up with the modifications (commercialization). Even today I do not take a single step without discussing with him and taking his consent. An elder brother couldn't be more proud to have such a prodigious younger brother.

Getting back to the topic for today; I wish to understand deeply as to why Pranjal thinks PPF is a big bubble that government is pulling in front of our eyes. Pranjal's decision making includes introspection from at least 3 perspective, 1st person, 2nd person and 3rd person. If the outcome of decision from all the perspective seems viable, he goes ahead with the choice.

For PPF, his first thought is, a government which doesn't miss a single opportunity on imposing direct/indirect tax whatsoever and bring on any economic reforms to keep its owl straight is giving an offer too good to be true.

Today after we talked I've researched and came up with my findings to conclude the topic of discussion.

The areas I'm going to cover are:
1. Market Inflation
2. Currency Performance
3. Currency Translation

1. MARKET INFLATION

1.1. Petrol Price
Data-Source : https://freefincal.com/india-petrol-diesel-historical-price-data
- 2013  : 34.80 (averaged across Mumbai, Delhi, Kolkata, Chennai)
- 2019  : 77.29 (averaged across Mumbai, Delhi, Kolkata, Chennai)
- %lift : 122.09 %

1.2. Onion Price
Data-Source : http://www.nhb.gov.in/OnlineClient/MonthwiseAnnualPriceandArrivalReport.aspx
- 2003 : 1140 (average retail price November)
- 2019 : 5333 (average retail price November)
- %lift : 367.80 %

2. CURRENCY PERFORMANCE

2.1. Dollar-vs-Rupee
Data-Source : https://in.investing.com/currencies/usd-inr-historical-data
- 2003 : 1 Dollar → 62.39 INR
- 2019 : 1 Dollar → 71.65 INR
- %lift : 14.84 %

3. CURRENCY TRANSLATION

When we go for stocks, the currency is translated to shares, similarly mutual funds are valuated on units in possession; however, when you invest in PPF it is directly dependent on valuation of INR because you deposit in INR.
Furthermore, INR must grow parallel to inflation to make it worth investing and give actual profits [apparently which is not the case here].

Once government got a taste of money, the appetite grew
- Robert Kiyosaki

Lets consider a data-backed example:
PPF Calculator: https://www.myloancare.in/ppf-interest-rate-calculator/
Assuming you use PPF in the best possible way, given that, you deposit yearly 1.5 lacs every financial year at the very beginning.

- [2003] Total Deposit : 18,00,000
- [2019] Maturity Amt : 43,98,642

Sounds interesting right ? Just you wait...

In 15 years, INR value decreased by ~14.84%

- [2019] Actual Value : 37,45,884

Market Inflation is 3.5% yearly.

In simple words if you used to buy commodity 'A' for 100 INR in current financial year, you can expect it to buy at 103.5 INR next year. Also, there is other way around, say if you used to get 50 grams of commodity 'A' for 100 INR in current financial year, you can expect it to be 48.3 grams of commodity 'A' for 100 INR next year.

Latter goes unnoticed many times because we barely see the contents and weight of the products before buying them.

[For Illustration : Back-Track decay of 3.5% annually]

- [2019] Net Value : 21,95,149
- [2019] Net Gains : 3,95,149

There we go, is it justified for PPF to give net gains of mere ~4 lacs for a lock-in period of 15 years ?

Acknowledging the fact that you can not liquidate the amount you've deposited in PPF.  

I've kept is very confined (no intention of blaming any government); but as you can see in 15 years a lot has changed.

In India, reported market inflation is ~3.5% [which I believe is more than that].

So practically if you keep your most of the money in savings account, you're actually reducing your money's value as you get ~3.5% interest annually and likely market inflation is more than reported 3.5%. Also, the laws in case the bank goes bankrupt only facilitates claims up to 1 lakh INR which is way worse than other developing countries.

Then came PPF, a perfect government scheme which gives you tax free benefits with a compunded-monthly credited-yearly formula to entice people. Till today I too believed in this 'too good to be true' scheme and was hoping to secure funds in it, but now I'm not sure if I will.

PPF account offers ~8% interest, in a country having market inflation of ~3.5% [reported] with a lock-in period of 15 years [where we witness prices going up to as much as over 300%]. Had it been slightly liquid [lock-in period <=3 years] I'd have gone for it further, but now statistics guide me otherwise.

I believe that government came up with a way for people to invest money for government [for practically no benefit whatsoever]; so that government can have a free hand at working without worrying for the finances [lock-in period ensures it], by giving tax-benefits as a bait.

In my opinion, ELSS mutual fund category is much better in comparison for the obvious reasons [lock-in period and interest gain].

I admit my study is confined hence, I may have missed a few crucial parameters and it could potentially be throwing off my interpretation off course, which is why feedback & comments are most welcome

Let us know what you think in comments below...


Best,
Pranav