Personal Finance - PPF

PPF

PPF is one of the safest instruments and should form a part of one’s portfolio. This is a long-term sovereign instrument with a 15 year lock-in period.

Ideally this can be used as a vehicle for your child’s education or retirement corpus. For a horizon of 15 years equity will beat PPF hands down any day but for conservative and risk averse investors this is godsend. Even for the risk takers, PPF can be a part of their debt portfolio (of course assuming asset allocation strategy is adhered to).

For funding your child’s education, start the PPF when the child is one to two years old and a sizable corpus would be ready when the child steps into college.

The minimum subscription is Rs.500 and the maximum is 1.5 lacs per annum.   My suggestion is to frontload the PPF i.e. invest 1.5 lacs a year at least for the first 5-6 years and then investments can be tapered if circumstances constrain you.

The power of compounding and long-term investing benefits can be seen below (@ 7% pa)

Investing 1.5 lacs for 5 years would fetch 17+ lacs after 15 years for the invested sum of 7.5 lacs

Investing 1.5 lacs for 10 years would fetch 30+ lacs after 15 years for the invested sum of 15 lacs

Investing 1.5 lacs for 15 years would fetch 40+ lacs after 15 years for the invested sum of 22.5 lacs

Though PPF is eligible for deduction under 80C, this is likely to vanish in the coming years as the govt is moving towards a less exemptions tax regime. So do not consider this as a tax saving instrument anymore.

Also, PPF interest is calculated on the least balance between 5^th and the end of the month, so invest it before 5^th of every month. Though the benefit is very miniscule considering the long-time frame it does gives you an opportunity to pat yourself that you are thinking smartly and bask in that glory.

For those considering this as a retirement vehicle the full limit of 1.5 lacs must be invested at least for 12+ years to reap the benefits.  Also PPF can be extended in blocks of 5 years with or without additional contribution.

Investing 1.5 lacs per annum for 15 years and extending for another 5 years would see the corpus growing to 55+ lacs.

The only caveat is the PPF interest rate is money-market determined and would move up and down but let this not deter you from investing in this risk-free sovereign backed instrument.

Happy Investing ☺