5 risks to know when investing in Public Provident Fund (PPF)

Public Provident Fund (PPF) is primarily a retirement scheme that using the corpus built over the years helps in manoeuvering the sunset years. Nonetheless, while it certainly has advantages such as the higher interest rate pay-out of 7.1 per cent per annum and also the EEE status i.e. it does not attracts any tax in respect of the investment, interest and maturity proceeds, nonetheless, there are certainly some risks which the investor should know before parking their corpus in the instrument.

Inflation risk:

First and foremost though you may be a risk-averse conservative investor, channelising all your financial savings into PPF may not be worthwhile in the long run as PPF will fail to yield the inflation-beating returns. Also, you need to understand that if at all PPF is part of your debt-portfolio allocation then don't allocate all your resources towards PPF as it comes with withdrawal and other restrictions. So, better also consider debt funds for the purpose.

Interest rate risk:

The Ministry of Finance decides on the interest pay-out for the investment once every quarter. Further, while the interest is calculated m-o-m, it is calculated on the lowest balance between the closing of the fifth day and the month end. And the interest on the same is credited as the FY concludes. Another, important point to note here is that this interest rate keeps on changing and is not static.

Policy risk:

Currently, while the scheme enjoys the EEE status, down the line similar to EPF for which the centre has now set a limit of Rs 2.5 lakh per year, there can be implemented changes too for the PPF scheme which comes with a longer term of 15 years.

Liquidity risk:

Also, there are withdrawal and other restrictions with the PPF scheme. So, be mindful of the fact, that you cannot as per your discretion access your corpus in PPF account. The PPF account allows financing/ loan facility after completion of one year, while partial withdrawal is facilitated after five years.

Not matching with your end financial goals: 

People in general are not able to make good decisions and they tend to put their money into PPF even if they may be in need of funds say 3-4 years down the line, so in entirety the investor fails to match the investment scheme with his or her broader financial goals.