Wednesday, January 22, 2014

Should I invest in Public Provident Fund

A 37 year old friend of mine came to me for advice on personal finance. Below is the glimpse of the conversation between us.
We started with usual Q-A; discussing on his cash flows, investments (if any), goals and risk taking abilities. Later that week, we met again and I gave him his so called financial strategy.

Considering various factors (like house loan, car loan, wife being housewife, his ability to withstand the volatility in the market), I came to conclusion that his equity to debt ratio could be around 20:80. Among many other debt options, I suggested him to exhaust PPF capacity for full 1 lakh.

Immediately after this recommendation he gave me a look of disbelief. His counter question was why PPF and he told me that even his dad had told him to save in PPF. As an new age guy (OMG), he expected me to give better and latest debt products. Now it was my turn to give him that look of disbelief. After stating advantages of PPF, I asked him why he did not listen to his dad. Pat came the reply, “PPF is for old fashioned”. I thanked my stars when he was convinced with PPF. I also thanked my stars for he did not tell me that “Insurance is passé and ULIP is in, dude”

I do not know if he followed my plan or went in search of another friend who could give him the debt products for today’s generation.

I am hereby listing advantages of PPF for reader’s ease.
The thing to remember is every product comes with pros and cons. The question one should ask to himself is “is it suitable to my profile”.

Advantages:

  • Investment done is eligible for tax deductions under 80C.
  • Returns are also tax exempted (As per the current government policy)
  • Ideal for long term savings
  • Money is compounded annually for 15 years (if you do not withdraw after 7 years)
  • After 15 years, the PPF account can be renewed in a block of 5 years
  • After 15 years, the PPF account can be kept as it is without more investing so that the already invested amount goes on to earn interest
  • Easy procedure to get the account opened (in SBI or ICICI) and invest money online
Disadvantages:

  • Cannot withdraw before 7 years and hence illiquid
  • Current rate of interest is 8.6% which is marginally above inflation (if inflation is assumed to be 8%)
Again, do not get carried away by the advantages or bogged down by disadvantages. The question to be answered to ourselves is “does this fit in my portfolio”

**For those who still do not believe in PPF, here is the online calculator. Try it.
http://www.ppfcalculator.co.in/calculate/


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