Saturday, April 11, 2015

Why do I have PPF account

The advantage of writing blogs is people come and ask you questions about what you write. Since in labels section, Money section has most posts, people come and ask questions about my money habits. This really keeps me on my toes. This post is about one such question from my friend. To answer him, I really had to go back 1 year and recollect why I had done so.



Below is the discussion:

Friend: I read you PPF article. While I agree that PPF is a good debt tool, do you really invest in it? Or was it just for the sake of a post?

Me: Offcourse, I do invest in PPF

Friend: Just like me, you too have MaxGain loan account. So effectively, you lose 10.4% to gain 8.5%. Are you kidding me? And if this is true, why are you still writing on money?

Frankly, I was not expecting direct attack on me and that too when I had just finished my lunch with boring gobi ki  sabji. I have to admit that the question caught me off guard. Definitely not because he asked me why I was writing. The reason I wasn't able to answer him back in split second was .. yes, I had forgot what was the logic of doing what I was doing.

It took me good 2-3 minutes to recollect the logic and satisfy my friend (no naughty meanings, please).

Me: While what you say does make financial sense, there is another angle to the whole story. That angle is what Ramit Sethi (of IWT fame) talks about. That is psychological angle.

Friend: Detail me bolo bhaiiyaa

Me: What if somebody asks you to choose from BMW with nominal EMI or a free nano with 5 years petrol free?

Friend: Ummhmm.. I would opt for BMW.. yes BMW

Me: Okay and why is that? Doesn't free nano with free petrol makes financial sense than choosing BMW with EMI

Friend: Yes but BMW to BMW hain yaar.. uske liye thode paise gaye to bhi thik hian..

Me: Exactly my friend. This is the angle that I was talking about. This is the psychological angle. Your mind is telling you that BMW is better than nano. At this time, you completely ignore the financial sense. Right?

Friend: Okay and whats your reason?

Me: Mine is simple. I have a very important goal attached to the PPF investment. I am aware that the rate of interest keeps on changing every year. However, PPF is not subjected to volatility. Capital protection is guaranteed. The goal is so important that inflation takes second priority and capital protection is most important.
Although I rarely withdraw money from the MaxGain still the problem with MaxGain is the amount there is highly liquid. PPF is rigid. You cannot pull money easily. This creates a psychological barrier and protects the money.

A person can go insane and withdraw money from MaxGain to appease his/her ego or his/her spouse may go completely irrational and screw the MaxGain. The screwing up of PPF is less likely since I am aware of the purpose of saving. The money in MaxGain is idle (offcourse it saves large interest but psychologically it is idle).

Tomorrow, if market tanks (or if so it seems to me), I may choose to buy Mutual Fund units from MaxGain. I cannot do this with PPF. So the money in PPF is not only protected from market volatility, it is also protected from my irrational behavior.

Let us take an example.

A bachelor guy who has this magic account which pays him 10% annual interest. However, this magic account is highly liquid in nature and has ATM card associated with it.

This guy now wants to save for his younger brother's education. He decides to dump all his savings into this magic account. Over the period of time, he has accumulated good amount of money in this account. This guy is happy now.
His friend buys a Royal Enfield. The bachelor guy gets to ride the beautiful vehicle 3-4 times and he falls in love with it. Suddenly, he remembers about this magic account. It has high liquidity as well. So off goes 1.5 lakhs from the account. Offcourse, maintaining a Royal Enfield is similar to maintaining a nano. So the expense column further increases.

Now, what will you suggest for this guy? 10% magic account with high liquidity or 8% account with terrible liquidity till it matures?

Friend: Itna kyun pakaya be mujhe...Seedhe seedhe ek line me bhi bol sakta tha na..

Me: Ek line me bolta to naya post kaise banta...


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