Choosing between the VPF and PPF for additional debt investments

Since both VPF (as part of EPF) and PPF have long-term maturity periods, these are best-suited to act as retirement planning tools

If you choose to invest additional sums in debt instruments, how do you choose between the VPF (Voluntary Provident Fund) and PPF (Public Provident Fund)?

So, even though all of us (or most of us) know that having exposure to equity via mutual funds is advisable for long-term investments, this article simply focuses on the debt side and tries to help pick between PPF and VPF for the long term.

The VPF currently offers 8.65 per cent annually, while the PPF offers 7.9 per cent.

So, on an as-is basis, the VPF wins over PPF. But would the VPF offers more than the PPF always? An analysis of the historical interest rates shows that the VPF almost always gives higher returns than the PPF. When it comes to returns, VPF is the clear winner.

Putting returns in perspective

But we should never focus on returns alone. It’s always advisable to assess other aspects and see if there is a product-investor compatibility in terms of achieving the stated goals.

Another important aspect is the lock-in or maturity tenure of the product.

The VPF (being a part of the EPF) is considered to be of long tenure till your retirement. You can also withdraw on resignation or if you don’t take up employment for two-plus months. But withdrawal on resignation isn’t advisable as it hampers the wealth creation process if you dip into long-term investments frequently. PPF, on the other hand, matures in 15 years.

Since both VPF (as part of EPF) and PPF have long-term maturity periods, these are best-suited to act as retirement planning tools.

For all practical purposes, you get your (VPF+EPF) corpus only at the time of retirement. This is not a bad thing as it helps keep retirement savings free from other goal obligations. PPF’s maturity may come much earlier than your retirement if the account is opened early in your working life. After 15 years, the full PPF corpus is available tax-free. And even if the PPF is extended beyond 15 years, the withdrawal restrictions are much more lenient.

If you have the option of investing in the VPF, then a combination of EPF and VPF can be a better option than choosing PPF over VPF, assuming you are using these for retirement savings. As for the non-salaried individuals and professionals outside the EPF’s scope, it’s a no brainer that PPF is a good option for debt savings for their long-term goals.

Investing limits

Another factor to think about is how much can you invest in either of them yearly?

The limit for the PPF is Rs 1.5 lakh per year. The VPF offers a higher limit with its rule of 100 per cent of Basic + DA. But if the employer has a salary structure where the basic is very low and thereby contribution via VPF is also limited, you can invest in the VPF and PPF.

You may have noticed that I didn’t discuss about the tax benefits. That’s because both belong to the EEE (Exempt- Exempt- Exempt) category. However, VPF withdrawals are tax-free only if held for more than 5 years.

But as we are having a VPF vs PPF debate from a retirement planning perspective, we should not forget the importance of proper asset allocation. You shouldn’t randomly choose between the VPF and PPF just for tax-saving and returns, ignoring the right asset allocation for your financial goals.

Remember, very few products are actually suitable for retirement savings.

If you are saving for retirement and are still several years (atleast a decade or two) away, then to save a corpus large enough to handle inflation in retirement years, you need to have good equity exposure in your retirement portfolio. Just saving for retirement through EPF (and VPF) and PPF may result in an inadequate corpus.

How much should you invest for retirement and do you need to increase VPF contributions or go for PPF?

Here are some pointers to help you arrive at a conclusion.

- Take the help of an investment advisor (or calculate yourself) to find out how much you need to save for retirement.

- Choose a suitable asset allocation strategy, say 60 per cent equity and 40 per cent debt.

- If you are investing in EPF and it already takes care of 40 per cent of your regular retirement contributions, then your debt investments are complete.

- But if EPF contributions don’t amount to 40 per cent, go for VPF to the extent that it helps you maintain your chosen allocation pattern.

- If you do not have the EPF / VPF option, utilize the PPF limit of Rs 1.5 lakh and for amounts above that, pick suitable debt funds.

- For the equity allocation (60 per cent in this case), invest via SIPs in good equity funds.

Depending on the individual’s requirements, various other strategies can be devised to help choose between VPF and PPF.