Know your money: Why boring old PPF is still the best investment you could make

On any given day, I receive atleast 5 mails from various mutual fund houses and brokers asking me to increase my investment in the market. But would that be a prudent move to make? Let’s talk about that.

Investors are forever asking, “How much return will I get on my money, and what is the risk in the investment?”. That is truly the all-important question, and for PPF or any debt based investment, that is easy to answer.

PPF currently pays out 8.1% per annum (the rates have been revised downward twice in the recent past) and that is guaranteed by the Government of India. That’s virtually risk-free, but that does not mean that the risk is zero. More on that in a separate post.

What’s more, the government wants you to invest in the PPF scheme, which is why they offer to knock off taxes against it. If you factor in the tax savings into the PPF rates, the effective return could be as high as 10.53%!

Post tax rates for PPF

The way the PPF interest payout is structured, it is more beneficial for you to make monthly investments in it, rather than a lumpsum amount towards the end of the year. So those of you who are pushing money into a Recurring Deposit and then sweeping the money as March rolls along into your PPF are actually doing yourself a huge disservice.

Lets see how much your interest income for a year will change depending on how you time your investments. If you put in Rs. 1.50 lakhs in April, you will earn Rs. 12150 on interest for this deposit. If you were to do monthly installments of Rs. 12500, your interest will total up to half of that — Rs. 5568. And if you were to do it at the last minute, in March, your interest income will be zero!

Your pre-existing investments in PPF will continue to earn interest, so don’t worry about that.

Some interesting facts about your PPF:

  1. If you fully invest the Rs. 1.5 lakhs currently allowed under section 80c for the next 30 years, and if the rate of interest continues at 8.1%, you would have a corpus of Rs. 1.73 crores!
  2. In that Rs. 1.73 crores, your own money is only Rs. 45 lakhs. The rest 1.28 crores is all interest income. No wonder Einstein called compounding the eighth wonder of the world!
  3. It is the only investment allowed for general public which is Exempt-exempt-exempt. You can reduce your inflow from your taxable income, the interest the account accumulates is exempted from your income, and withdrawal against the fund is exempted too!
  4. You can take a loan against a portion of your accumulated money after the 4th year.
  5. You can withdraw a portion of your accumulated money after the 7th year.

The fine print:

  • You can walk into any SBI branch, some of the big private banks (ICICI and HDFC), or your post office, to open a PPF account.
  • It can be opened in the name of a minor.
  • You can have only one PPF account.
  • NRIs cannot open PPF accounts.

I know there are more questions bubbling up in your mind: is the government of India really risk-free? Is 10.53% good, bad or ugly? Why the hell should I lend money to the government anyway? Are there any others? I’ll try to answer all these and more in upcoming posts.

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