Yes, you can become a Crorepati too!
Simple Finance weekly newsletter (Week 7)
If you are just about to start your journey towards financial freedom, it is always better to look for options where there is no risk of loosing your capital and where you are assured of returns.
Let’s jump right in to the topic at hand, I will list yet more advantages of PPF later.
How to accumulate 1 Cr is using PPF-
PPF currently offers a fixed Interest of 7.1% per annum. The rate of interest is declared quarterly. In a year, the maximum amount you can invest in a PPF account is 1.5 lakhs.
So if you invest 1.5 lakhs every year and it grows at 7.1% then in 25 years you would have accumulated 1.03 Cr.
If you are married, your spouse can open a PPF account and get similar returns in their account. As a couple you can reach the goal of 1 Cr in 17 years by investing 3Lakhs every year.
Further if you stay invested for 5 more years (30 years in total) then the 1.03 Cr jumps to 1.54 Cr giving a combined return of little over 3 Cr in both accounts. This is the power of compounding.
The cherry on top is that the 1.5 Lakhs invested every year will get you Income tax deduction under section 80C, If you are able to invest lets say 30,000 from the tax saved for similar duration an Index Mutual Fund and earn 8% then at the end of 30 years you will have around 24 Lakhs more.
Though the rate of interest may not seem high, the interest you earn is totally tax free and finally when PPF account closed to withdraw your accumulated amount, the whole amount is tax free giving PPF scheme “EEE” status.
The word ‘Provident’ has a very good meaning, it means being frugal and saving for the future. The whole purpose of starting with PPF is to instil a discipline and willingness to save and invest, avoid the risk associated with Stock markets, and experience the phenomenon of Compound Interest.
PPF is a Government backed scheme and offers risk free, guaranteed returns. A PPF account can be opened with a Post Office or any nationalised bank, private banks also offer this facility. It can be opened by going to the bank branch or even in online mode from the comfort of your home.
Since the scheme if run by Government, which bank you choose does not matter. The account can be transferred to other location as well.
To use PPF account optimally you can invest the whole 1.5 Lakhs at the start of the Financial year to earn interest on the whole amount, or you can make 12 monthly instalments of 12,500 Rs to max out your account. The best option is to invest the whole amount (1.5 L) before 5th April every year, second best would be to invest a given amount before 5th of every month. Earlier you could make only 12 deposits in a year now there is no such restriction. The interest is credited at the end of each financial year. As you go on, you will realise that the amount of interest credited to the account is more than the yearly contribution made.
A PPF account has a tenure of 15 years which means you can fully withdraw the account balance only after 15 years and it can be extended by 5 years at a time for any number of times.
The extension can be with or without contributions. But once extended without contribution, you can not shift to contribution mode later on. In contribution mode, you can not withdraw more than 60% amount present at end of the block. You can consider it as Systematic Withdrawal Plan (SWP) for maintaining a flow of money after retirement.
The Minimum investment to keep the account active is just 500 rs in a year and maximum investment as we have seen is Rs 1.5 lakhs. You can invest more than 1.5 Lakhs but you will not get any interest on the amount in excess of 1.5 Lakhs, most probably transaction beyond 1.5 lakhs will get declined.
If you already have a PPF account but you have not put any money in it this Financial Year, please do so with at least Rs 500 to keep it active.
Premature closure is possible after 5 years but on specific reasons like higher education of children, detection of a life threatening disease or change of status from resident to NRI but interest earned will be lower by 1%.
Partial withdrawal is also allowed after 5 years, it will capped to 50% of balance at the credit and Loans of upto 25% of the accumulated amount can also be availed after completion of one year and before 5 years after the year in which the account was opened.
There is a provision of Legal Immunity for the PPF account, as long as the amount remains invested in a PPF account, it would be immune from attachment for recovery of the tax dues, divorce, settlement of disputes etc. But keep in mind, once you withdraw the money from the account to your savings account the Legal Immunity will not be there.
You must be wondering that since PPF has so many benefits, I will open 2 or more accounts in my name. Unfortunately its not possible, Only one account can be opened in your name, you can open an account for your Minor dependent but the 1.5Lakh will be calculated together.
PPF bodes well for the investors who are looking for a good debt option for apt asset allocation.
Ideal Asset Allocation-
A standard formula for Equity to Debt allocation is 100-(your age).
100-(your age) should be the maximum exposure you should take to equity. If you are 25 years old and you can save and invest 10,000 every month then 7500 would go to an equity mutual fund and 2500 should invariably go to a debt instrument.
The younger you are, you can take more risks, you can afford to make mistakes early on. This formula also states that you can not be 100% invested in equity. There are many youngsters who are 100% invested in cryptocurrencies, which are even more volatile and have a potential to go bust.
The recent boom in stock market has made many people feel that they can bear any amount of risk, they can pick good stocks and all their decisions are correct, this is a false sense of risk tolerance, since in a booming market everything is going up and everyone is making money.
But the risk taking ability or risk tolerance comes under serious question when the market is going down or moving sideways and there are periods of negative or no returns on your investments. Debt as an asset class gives a strong foundation to your portfolio.
“Working because you want to and not because you have to is financial freedom.”– Tony Robbins.
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