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NEW DELHI:Public Provident Fund (PPF) is one of the best instruments available for retirement savings. Historically, it has offered better rates than bank fixed deposits. Then there is the tax benefit – you get a tax deduction on investment, and there’s no tax as your money grows or when you withdraw on maturity. It’s available for salaried as well as the self-employed.

But you cannot rely on PPF alone if you are saving for retirement. That isbecause you can earn better returns when you invest in a diversified equity fund for the long term. Also, the interest rate on PPF is uncertain – the central government can change it every quarter.

Large-cap equity funds, for example, have given an average return of 11.92% over the past 10 years, according to data from Value Research. The large and mid-cap category gave 14.32% returns in the same period. On the other hand, the interest rate on PPF is 7.1% at present.

Here’s an example to understand how the difference in returns can impact your investments. Suppose you invest Rs50,000 every year in PPF and the same amount in a large-cap fund for your retirement.

Say, the average interest rate on PPF comes to 7.5%, after 20 years, you will have a corpus of Rs25.40 lakh. The entire money will be tax-free.

If your average return from equities is 10%, you will have a corpus of Rs34.87 lakh. Even if you pay 10% long-term capital gains tax on this entire amount, you will still end up with 31.38 lakh.

But this doesn’t mean that you should avoid PPF altogether. Instead, use it along with equity for your retirement planning. Adding an instrument like PPF in the debt portion will give stability to your portfolio. It will help to diversify your investment which brings down risks.

You will need to rebalance your portfolio at least once a year to maintain the desired asset allocation.

Investing in debt is essential. But it’s up to you to decide the allocation based on your risk profile. If you can handle the volatility in equities, you can have a lower allocation to debt.

As a thumb rule, your equity allocation should be 100 minus your age. It means you can start with a higher equity allocation but every year increase investments towards debt marginally.

(Do you have personal finance queries? Send them to mintmoney@livemint.com and get them answered by industry experts)

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