Why my father always recommend to invest in PPF?

I think fathers everywhere in India are the same, atleast mostly. Even my father kept telling me that his Employee Provident Fund along with General Provident Fund (in his days it existed, I don’t know now), Gratuity Fund have helped him save a decent nest egg. I replied to him that it is a slow process and I cannot get most of it back till I turn 60.
As time passed by, after learning about investments, I realized that, a proper investment portfolio needs to have equity, as well as a decent bit of debt component also. So, I thought what is wrong in going for PPF for the debt portion of my portfolio?
Good points: It is a Govt guaranteed scheme, provides 80C benefits, with interest rates set quarterly by the govt based on market rates, it is EEE - exempt from income tax on principal, accumulated interest as well as maturity amount.
Not so good points: a few, like a minimum lock-in period of 15 years, moderate returns, and needs disciplined investment - (before Apr 5th of every FY) the full amount of Rs. 150,000 has to be deposited to get the full interest advantage.
So, I did some calculations and felt that it was a decent avenue to keep my debt portion of investments. Incase, anyone decided to start investing in PPF starting from Apr 1, 2018, the calculations[1] might look like this. Interest rate may vary, but for calculation purposes, I have assumed a constant rate.
If we see the above calculations, starting from 9th year onwards, the amount of interest earned in a year will start becoming greater than the principal amount of Rs. 150,000.
Just to give sufficient ‘proof’, I am showing my investments in PPF. Every year, before Apr 5th, I deposit Rs. 150,000 and, by the end of every financial year, the interest comes into my PPF account, which is automatically reinvested along with the next year’s fresh principal as well as the accumulated principal. The interest deposited in my account at the end of FY18, as you can see was Rs. 1,07,145. In the previous year, the interest was Rs. 91,494
So, in a year or two, my yearly interest earned will start exceeding my yearly investment and when the maturity comes up at the end of 15 years, I will extend it by another 5 years (incase I don’t need the money) and if possible, extend it by another 5 years, so that my kid can have that maturity amount, when he finishes college - to start a business or for higher studies, as per his choice.
So, PPF is a good investment as a portion of the overall portfolio but never consider it as a wealth building mechanism (as it cannot give sufficient returns) on a standalone basis. For that, you need to consider other investment avenues like direct equity, mutual funds, a little bit of gold, maybe some real estate etc.

Comments

Post a Comment

Popular posts from this blog

3 Ways to Invest in Commodities in India stock market concept

Image
Invest in Commodities in India Recently, the price of crude oil went negative due to very low oil demand because of coronavirus. This very low price of crude oil aroused interest in many traders and investors to invest in crude oil. Not only just crude almost every commodity be it natural gas, copper, aluminium, etc are also trading at very low prices. In this post we will discuss 3 ways to invest in commodities in India. #1. Buy directly from MCX All you need is a commodity trading account, which almost every broker offers. Once you have activated the commodity trading account you can directly buy crude oil and also other commodities as well through your broker. The drawback here is that commodities are traded in derivative form, which means you can trade in them through futures and options contract, which have an expiry date. So this is more of a trading product and not an investment product as you can’t hold it for long without rollover. Just recently, since US...
Read more

Do you also believe that long-term investors make more money than day traders? Why and how?

Image
Do you also believe that long-term investors make more money than day traders? Why and how? There are a number of highly successful long-term investors. The likes of Warren Buffett and Charlie Munger instantly spring to mind. They have generally returned around 20% per annum over their investment careers. While this level of return is unlikely to make any investor rich in the short run, when compounded over a long period it can lead to significant returns. For example, over a 30-year time period it could propel an initial sum of money around 237 times higher. As such, even modest sums could become seven-figure portfolios. Of course, most investors may be unable to deliver returns which are as high as 20% per annum over a 30-year time period. However, even returns which are in line with those of the wider index could end up turning a small portfolio into a large one in the long run. For example, returns of 8% per annum over the course of three decades would equate to an end...
Read more

What is the shocking secret of Ratan Tata?

Image
What is the shocking secret of Ratan Tata? 1. 65% of his earnings goes to Charity:  Ratan Tata couldn’t place himself in the billionaire list because a large amount goes in the charitable trusts ( around 65% of his earnings). He is one of the most generous person in India. Salute to his great work. 2. Donates every year for education:  Ratan Tata is very known widely for his donation activities in the country and he also donates a huge amount in the education sector. He gave $50 million to Harvard Business school and $25 million to Cornell University, specially for the Indian students. 3. Parents got separated:  In the year 1940, Ratan Tata’s parents got separated and at that time he was just a 3-year old kid. After that he was looked after by his grandmother. 4. IBM offer:  When Ratan Tata completed his education, he got a job offer from IBM but he refused to take that job and joined his family business. 5. Education:  Ratan Tata stud...
Read more