PPF – Stable Investor

How to use PPF to save Rs 1 Crore – Be PPF Crorepati

by Dev AshishJanuary 24, 2019April 3, 2019 Leave a comment

Rs 1 crore is still not a small amount. But whether it is sufficient or not depends on why you actually need it.

So for example, if you were to ask me whether Rs 1 crore is enough for retirement? In most cases, the answer would be a No. Retirement planning is a nasty problem and you can’t just ahead with random numbers for your retirement corpus.

But still, there is a psychological attraction to this figure of Rs 1 crore and becoming a crorepati that us Indians can relate to.

PPF is a beautiful debt product. I have already written about it earlier too (link).

And even though investing in equity is a necessity and highly advisable for the long term, a product like the PPF can still be a part of the overall portfolio. And I am sure the term PPF crorepati in the title would have already captured your interest by now. 🙂

However, PPF is not a short term investment option as it has a lock-in period of 15 years. But still, you can make partial withdrawal after few years. And You can even extend the maturity by a block of 5 years for multiple times. It currently falls under the ‘EEE’ category, which means that PPF contribution, interest earned on PPF and PPF maturity proceeds are exempted from tax.

Interestingly, a few days back I got a mail from a self-confessed conservative investor.

He said that he was slowly increasing his equity investments. But still he felt that he cannot part ways with something as sure-shot and as risk-free as a PPF account. And he wanted to know how long would it take to accumulate Rs 1 crore in PPF?

I felt that this question might interest others as well.

So this post is about finding out:

How to accumulate Rs 1 Crore in PPF (Public Provident Fund)?

And if you are low-risk conservative investor who wishes to accumulate Rs 1 Crore, then PPF is a decent option.

Let me try to answer this from various perspectives:

If you contribute Rs 1.5 lac every year for a period of 15 years, your PPF balance will be about Rs 43.9 lac at the end of 15 years (assuming a stable interest rate of 8.0% per annum).
If you contribute Rs 1.5 lac every year for a period of 15 years and then don’t liquidate your holding for another 15 years, then your PPF balance will be about Rs 1.39 crore at the end of 30 years (assuming a stable interest rate of 8.0% per annum). You will achieve the target of Rs 1 crore around the 27th year.
If you contribute Rs 1.5 lac every year for a period of 15+5+5+5=30 years, then your PPF balance will be about Rs 1.83 crore at the end of 30 years (assuming a stable PPF interest rate of 8.0% per annum). And you will reach Rs 1 crore during the 24th year itself.

But what if you are unable to invest Rs 1.5 lac every year (the full PPF annual limit), then obviously your target of reaching Rs 1 crore in PPF will be delayed accordingly.

Also, if the interest rates go down in years to come, then once again your target of reaching Rs 1 crore in PPF will be delayed to that extent.

So to sum it up, you can become a crorepati if you put Rs 1.5 lac every year in PPF then you can accumulate a corpus of Rs 1.08 crore by the end of the 24th year (assuming that 8% return)

But as you know, neither the PPF limit remains same nor PPF interest rates remain unchanged over the long term.

So let’s try a hypothetical scenario which might actually play out in the near future:

Suppose you begin saving full Rs 1.5 lac in PPF today. Government increases the annual PPF investment limit by Rs 50,000 every 5 years. It is assumed you will continue to invest as much as is needed to fully utilize the annual investment limit of PPF every year. The interest rates also reduce by an average 0.5% every 3 years or so.

What will be the result then?

At the end of 15th year, your total investment of Rs 30 lac would have become about Rs 49.4 lac.

If you continue investing (after extending your PPF account with contribution) for another 5+5+5=15 years, then at the end of 30th year, your total investment of Rs 82.5 lac would have become about Rs 2.02 crore.

Here is the tabular depiction of the excel:

As you might have observed by you, it is only after the initial few years that the actual compounding of the PPF investments becomes visible. And it is for this very reason that you should try not to disturb (withdraw from) your PPF account for as long as possible and try to extend its tenure after the first 15 years lock-in period.

Do you want to try some different scenarios of your own?

You can do so.

You can download this FREE Excel PPF Calculator and play around with inputs. If the previous link doesn’t work, use the link below:

Excel PPF Calculator (2019-20) Free Download

You can even check out historical PPF interest rate and how things have changed in the past when it comes to PPF.

Now, the current limit for PPF is Rs 1.5 lakh per year.

But what if you want to invest more?

Obviously, you need to respect the limit.

But if both husband and wife can contribute to PPF, then things can get fastened a bit.

Save Rs 1 crore Quickly using Husband PPF + Wife PPF

What needs to be done is that a PPF account needs to be opened for both you and your spouse.

Since both the husband and the wife can deposit Rs 1.5 lakh per annum, it means you can contribute Rs 3 lakh every year in PPF. And you will get interest in both these PPF accounts for the entire period of 15 years or more if extended.

So how much do you end up with if both you and spouse contribute Rs 1.5 lakh every year for 15 years?

The answer is Rs 43.9 lakh each, i.e. a total of Rs 87.8 lakh.

So if both of you save diligently, you can achieve Rs 1 Crore in about 17 years. Here is a sample depiction of PPF Husband Wife calculation:

So if you are a conservative investor, who isn’t much interested in volatile investment options, then PPF can be helpful. PPF can help you become a crorepati in a safe way.

If you put Rs 1.5 lakh every year in PPF, then you can accumulate a corpus of Rs 1 crore by the end of the 24th year.
If both you and your spouse put Rs 1.5 lakh each every year in individual PPFs, then you both accumulate a corpus of Rs 1 crore by the 17th year itself.

And if somehow you manage to continue investing for the 30 years (i.e. 15 years original and 3 extensions of 5 years each), then you will be able to accumulate a really big corpus.

So before I close, let me list down some facts about the PPF for your ready reference:

PPF Interest Rate – 8% (check PPF interest rate history)
PPF Duration – 15 years
Extension of PPF Account – After the maturity period of the original 15 years, it can be extended in blocks of 5 years each multiple times
Minimum deposit amount (per year): Rs 500
Maximum deposit amount (per year) : Rs 1,50,000
Number of installments every year: 1 (min) to 12 (max)
Number of accounts an individual can open: Only 1. If there is a 2nd PPF account, it is treated as invalid and doesn’t earn any interest.
Tax Savings – EEE status, i.e. the annual contribution (up to Rs 1.5 lakh) provides tax benefit under Section 80C. Interest earned and the maturity amount is fully exempted from taxes.
Interest on PPF is calculated on the minimum balance in the account between 5th and the last day of each month. So if you invest monthly, then it makes sense to do it before 5th every month.
You can further maximize your returns in PPF by investing the full amount at the beginning of the financial year itself. Ofcourse this is not easy for everyone. But if you do so, the full amount earns interest every month of the year.

Here is the link to download the free excel-based PPF Calculator again:

Excel PPF Calculator (2019-20) Free Download

Use the above excel with your own inputs and you can use it as a PPF crorepati calculator.

And before you accuse me of being too gung-ho about PPF, I repeat that equity is the best asset to create long-term wealth. You can become a crorepati by investing in mutual funds too. Here is How much to invest every month in mutual funds to get Rs 1 crore in 20 years.

Also, read how Rs 1 lakh invested every year for 20 years can create a Rs 90+ lakh portfolio without any problem

But let me tell you something.

Investing in equity does come with its own share of ups and downs in the near term. But if you look at the average annual returns of Indian Stock Market, then it will show how you can create some serious wealth from equity. The idea of this post was to tell how a comparatively safe and risk-free savings option like PPF can be used to accumulate a large corpus of PPF Rs 1 crore.

For most people, its advisable to have a balance between equity and debt when investing for long.

But if you aren’t sure whether you are saving and investing properly, do get in touch with an investment advisor soon (how?).

Complete Guide – Sukanya Samriddhi Account (with Updated 80C Tax Benefits)

by Dev AshishApril 5, 2015January 23, 2019 15 Comments

A friend recently asked me about the newly launched Sukanya Samriddhi scheme. Though I wanted to tell him that for long term, equity MFs are the best bet, I still refrained from giving him an immediate reply and decided to do a little research.

To be honest, I had been hearing this from all quarters that this scheme was a safe option for investment…something on lines of PPF. But I was not sure myself. So I decided to do my bit.

So here is a small guide, which I think covers most of the aspects and features of Sukanya Samriddhi scheme.

What is Sukanya Samriddhi Account (SSA)?

SSA is a new and supposedly risk-free investment product, launched by the government a few months back. It is an investment scheme, launched especially for the girl child. But tax deductions (benefits), can also be claimed by the parents.

The claimed objective of the scheme is to help parents create a corpus of funds for girl child’s education and marriage. But while researching for this topic online, I read it somewhere that with this scheme, government is trying to send out a social message too that girl child is not a burden. And if planned well in advance (through schemes like SSA), it is possible for parents to secure a girl’s future.

People compare SSA with PPF due to similar structure, interests, etc. But it’s not entirely correct to compare, as PPF is not linked to any specific purpose. Whereas SSA, has a very clearly defined end-purpose of girl’s education and marriage.

But how will the government ensure that funds are being used either for education and marriage of the girl child, is another topic of debate (which I don’t intend to cover) in this post. I just hope that this good intentioned scheme is not used primarily for dowry-accumulation, because if that is the case, then it will be really sad.

Who can open a Sukanya Samriddhi Account (SSA) and for whom?

SSA can only be opened for a girl child who is not more than 10 years of age. But for the first year of its operation, government has given a grace period of one year (valid upto 1^stDec 2015) – this means that account can also be opened for a girl who is born between 2nd December 2003 and 1st December 2004.

Only parents or legal guardian of the girl can open this account. And it has to be opened in the name of the child. Please note that you are only allowed to open one account for one girl child. And a maximum of two accounts can be opened for two girls.

How much money can be deposited?

A minimum of Rs 1000 has to be deposited in SSA, in every financial year. And the upper limit has also been set at Rs 1.5 Lacs. But there is no cap on the number of deposit transaction you can make in a given year.

When the account is opened for the first time, you have to mandatorily deposit a minimum of Rs 1000.

But what if you are not able to deposit any money in a particular year? Or you deposit an amount less than minimum required amount of Rs 1000? Don’t worry. For each defaulted year, a small penalty of Rs 50 has to be paid to regularize the account. But please remember that along with the penalty, you also need to pay the minimum of Rs 1000/- for each defaulted year.

An irregular account can be regularized anytime till the completion of first 14 years.

But there is one small issue with the deposit transactions in SSA. As of now, the deposit can only be made by Cash, Cheque or Demand Draft – But Not Online. For those of us who are so used to doing almost all investment related transactions online, this is a big turn-off. But my guess is that it is only a matter of time before online option is made available.

What are the Interest Rates?

For 2015-16, the interest rate for Sukanya Samriddhi Account has been notified as 9.2%, calculated on a monthly basis but added to the account on yearly basis. This interest income is Tax Free (announced in 2015 Budget).

Previously, the rate offered for SSA was 9.1%. Please note that this rate is not fixed and will be notified every year, just like it is done for PPF.

Currently the PPF gives 8.7% and hence on just interest rate basis, SSA @ 9.2% seems to be a better bet. But since these rates are to be revised every year, we cannot be sure whether SSA will always have a better rate than PPF or not. But my guess is that since SSA is also about a social cause, chances of SSA rates going below PPF seem low, atleast for next few years.

But does it mean that SSA is better than PPF? I will request you not to judge the two products solely on basis of interest rates. There are few more important criterias, which should be taken into account before taking a final call.

What is the Duration of the Scheme?

The scheme matures on completion of 21 years from the date of account opening or as the girl child gets married, whichever is earlier. Please note that the girl attaining the age of 21 years has no relevance to maturity period of this scheme.

Though scheme duration is 21 years, you are only allowed to make deposit contributions for first 14 years. After the 14th year, you cannot make any further contribution, but the account continues to earn interest at the notified rates on balance amount for the rest 7 years (upto 21st year).

A few important things to note here are that in case the account is not closed on maturity (even after 21 years), the balance amount will continue to earn interest as specified for the scheme every year. And in case the marriage of girl takes place before the maturity date (i.e. before completion of 21 years), neither any further operation of this account will be permitted nor any interest will be payable beyond the date of marriage.

When is the money paid out?

SSA matures after 21 years of account opening. But money can also be withdrawn for marriage before this 21-year period. But for that, parents have to give an affidavit confirming that girl is an adult (18+ years) and hence reducing the use of money for child marriage.

I am still not sure how government will ensure that money is being used for marriage or education. Please feel free to share your thoughts on this.

Parents are also allowed to withdraw 50% of the balance amount after the girl reaches 18 years of age. But this can only be done for use in girl’s education. Rest of the money is to be left in the account so that it can be used for the marriage purpose.

What are the Tax Benefits for Sukanya Samriddhi Scheme?

The Budget 2015 put SSA in the EEE (Exempt-Exempt-Exempt) category. This means that contributions to SSA can be claimed as deductions under Section 80C. Yearly interest income (which is anyways added back to the amount in account) is also tax-free. And finally, the total amount at maturity or withdrawal is also tax-free.

But keeping SSA under the purview of 80C has its drawbacks too. Section 80C in itself has a ceiling of Rs 1.5 lacs and is also used by other investment options like PPF, 5-year FDs, Insurance, etc.

So in all probability, if you do invest a full Rs 1.5 lacs in SSA and also have other investment in PPF, 5-year FDs, you wont be able to get the full benefit. And that is because even though your investments which are eligible for deduction are more than Rs 1.5 lacs, the upper cap of Section 80C will restrict your deductions to just Rs 1.5 lacs.

Can there be partial withdrawals?

As already mentioned in one of the above section, you are allowed to withdraw 50% of the balance amount at the end of the preceding financial year. But this can only be done once the girl has attained the age of 18 years. And since the maximum age at which the account can be opened is 10 years, there is practically a complete lock-in period of 8 years.

Can there be premature closures?

Yes. It’s possible. The account can be closed prematurely as the girl completes 18 years of age, and provided she gets married before the withdrawal.

How is the interest calculated on Sukanya Samriddhi account?

The interest calculation for SSA is similar to that of Public Provident Fund (PPF). The interest is calculated monthly, but added back to the account at the end of year.

Sample Calculations

The below table illustrates sample calculations for SSA, where a monthly amount of Rs 5000 is deposited. The account is opened when the girl child reaches of the age of 6 years.

As you can see, contribution of Rs 5000 monthly is only made upto the 14^th year of account opening. But the overall corpus grows to almost Rs 30.79 lacs at the maturity in 21^st year.

Also when the girl child reaches 18 years of age, an amount equal to 50% of preceding year’s balance can be withdrawn. In above example, this amount equals 50% of Rs 12.83 Lacs, i.e. about Rs 6.41 Lacs.

Here is another illustration, which shows the amount accumulated in corpus at the end of 21 years (of account opening), depending on amount of annual investment – from Rs 10,000 to Rs 1.5 Lacs.

Is this the best option available?

I will prefer not to answer this question now and give my views later on in the post. But you need to be understand that if you only consider interest rates for choosing SSA over PPF, then that is not the right thing to do. And its because there are important things like liquidity, lock-ins to compare too. What is the point of saving money if you cannot use it when you need it (lock-in)?

How does it compare with PPF?

Documentation Requirements

Only three documents are required for opening of SSA in girl child’s name. These are mandatorily required and are as follows:

Birth Certificate of the girl child

Identity proof of the parent/guardian

Residence proof of the parent/guardian

You can open SSA in any post office or authorized bank branches.

Other Important Things To Note

As of now, there is no nomination facility available for this scheme. In the event of girl’s death, the account will be closed and the balance will be paid to the parent/guardian of the account holder.

The SSA is transferable anywhere in India if there is a need for the same.

If there are two girls, you can invest Rs 1.5 lacs into each girl’s SSA. But you can only claim tax benefit for a maximum of Rs 1.5 lacs (upper cap of Section 80C)

My Thoughts

The very basis on which Sukanya Samriddhi Scheme is based is to provide adequate funds for a girl’s education and marriage. And considering that account can only be opened upto the age of 10 years, its obvious that investment in this scheme is of long term nature (you can only withdraw when girl turns 18). And with this fact in mind that this scheme is to fund long-term goals, a return of 9.2% does seem to be on the lower side, when compared with what well-diversified mutual funds have delivered in the past.

Even in a small study about long-term returns for lump sum investments in mutual funds, it was found that when investment horizon is in excess of 7 or 10 years, it makes sense to invest in mutual funds, almost irrespective of current market levels. And that too in lump sum, if possible. If not, even regular SIP will beat PPF-type returns.

For someone who is adamant on not taking any risk at all, Sukanya Samriddhi Scheme makes a lot of sense. Not everyone is comfortable investing in equity linked schemes and one should respect that fact. A lot of investors prefer guaranteed returns at the cost of earning lower returns. And as a matter of fact, tax-free return of 9.2%, and that too without risk* is not bad at all for a conservative, low risk-appetite person.

* But the risk of lower returns (9.2%), when compared to that offered by equity MFs (12%+) still remains.

While doing research for this post, I came across a post by Prof. Pattabiraman, where he has raised some genuine concerns. I am enlisting a few of them here and you can read the rest in his post:

You are only allowed to withdraw 50% when the girl child reaches the age of 18. But these days, most children complete their schooling by 17 and hence you don’t want most of the money locked at this stage. Education for a girl child is more empowering than marriage and hence money should be easily accessible when it is needed most for education.

In another post about SSA, he mentions few more relevant points:

You are only allowed to invest for 14 years. But what about the rest of time upto 21 years (assuming you opened SSA when the girl child was born)?? At the end of 14^thyear, you can’t even start investing in equity as the real money-making power of equity investing can only be seen if you invest for decades, and not when 14 years have already passed.

So what should one do?

I think that if you can bear with volatilities of stock market investing and can really stay on course for 15-20 years, then there is no sense in parking money in Sukanya Samriddhi Account. And that is even after considering the tax benefits. You should start doing SIP in well-diversified Mutual Fund. Period. No need to think about anything else.

But if you feel that you are not very comfortable with mutual funds, then you can choose to split money between PPF and MF. Or between SSA, PPF and MF.

You can do 60-40 split between MF & PPF. Or a 40-30-30 split between MF-PPF-SSA.

I suggest PPF even though its returns are lower (8.7%) because of higher liquidity when compared to SSA. I personally feel that we generally neglect liquidity when it comes to financial planning. But it’s a very important factor. And I quote from Prof’s post in italics below:

After 15 financial years, the full PPF corpus is liquid. The idea is to have full liquidity on the entire corpus when [the girl] is about to enter college. Liquidity is more important than returns. Adequate exposure to equity mutual funds will always offset the small ~1% difference in return between Sukanya Samriddhi Account and PPF.

To be honest, SSA is more of a savings scheme and less of a investment vehicle. And there is a difference between Saving and Investing.

If there is anything more that you would like to know, please do let me know. And if you find some other useful information which I might have missed out, please share the same in comments and I will add it to the main post for benefit of other readers.

Mailbag: 22 years old & ready to invest for 25 years!!

by Dev AshishJuly 19, 2013 15 Comments

A young reader (Dhruv) in his early 20s asked us a question. He has 25K to spare every month. He wants to know his options if he wants to invest this money (every month) for next 25 years. As we mentioned earlier also in our previous post, we are delighted to see that people ready to commit to long term wealth building for decades and not years. 🙂

So in this post, as we promised, we will try to address our young reader’s query.

But remember, there is no perfect way. People might take different roads to the same goal. So, go ahead and do let us know of your views in comments section.

Theoretically, putting aside 25K every month for next 25 years in a simple PPF account itself would create a corpus of 2.6+ Crore. And that is without even taking any risks. These are sure-shot returns. Unless the govt. and everything else comes crashing down.

But since you are young, it makes sense to take some risks. And with time horizon which you have, many (if not all) risks of so-called risky assets can be evened out.

We don’t know much about you, your family or your financial background. We only know two things. You are ready to invest 25K every month. You are ready to do this for next 25 years. Due to lack of important information, it is fundamentally not possible (and unethical) to suggest anything concrete here. Therefore, we will make certain assumptions and then give our thoughts.

Assumptions

You are ready to invest 25K every month NOW.
You don’t have any liabilities NOW.
Your income (salary, etc) will increase every year for next 25 years.
Your liabilities will increase in future (not uniformly though). i.e., you would need to fund your higher education, marriage, honeymoon, parent’s health, property purchases, etc.
Hence we assume that though your income would increase, you will not be able to increase your contribution to investments. Your investment contribution would remain fixed at 25K per month.
You and your family are adequately insured.
You and your family have adequate health insurance.
Though glamorous, we have chosen not to include individual stocks as an asset class for your wealth creation plan. It requires effort and passion. Since we don’t know much about you, it is best to avoid it. 🙂

What We Suggest

Before even thinking of investing, keep aside 6 month’s expenses worth of money in some liquid asset classes. You can keep it in a savings account or an online fixed deposit. These days it’s easy to make (and break) online fixed deposits when required. So this should take care of your Emergency Fund.
From the 25K, you should put in 10K (8.33K to be exact as there is a limit of 1 Lac on investing in PPF each year)* every month in a PPF account. This would turn into around 85 Lacs in 25 years. Now this is separate from your and your employer’s PF contribution. Remember, you cannot touch this money before 15 years (though you can withdraw some after 6 years, let’s not get into those details).
For the remaining 15K, chose 4-5 good mutual funds. As one reader suggested in the previous post, it is better to stick with index funds when considering such long term horizons. That way, dependencies on fund managers and his team are reduced to almost nil. So you can go ahead with 3 index funds (4k, 3K, 3K = 10K). But it is also advisable to pick two well established actively managed funds (2.5K each). These funds should have been in existence for more than 10 years and should have proven the mettle in multiple market cycles. For names of such funds, check out our last post and its comment section. This 15K every month for next 25 years would create a corpus of around 2.2 Crore.

Problems which you might face in future

Now suppose that you want to buy a property after say 5 years. You would definitely be tempted to take money from this corpus which you would have created in last 5 years. Now though this approach looks sane and full of common sense, the problem would be that this would break the COMPOUNDING. Once compounding breaks and you continue to invest for next 20 years (after 5 years from now), your PPF contribution would have become 52 Lacs & MF would have become 1.2 Crore (Down from 2.2 Crore in previous case). So, you should plan your big expenses in such a manner that you long term compounding is not interrupted.

So how can one do this? Though it may not seem like a good idea at first, what you can do is to reduce this 25K contribution in PPFs & MFs to around 15-20K. Park the remaining money every month in some recurring deposits or income funds. This way, you would have started preparing yourself for future expenses and would not be required to interrupt compounding of your investments.

Hope that helps. Others are welcome to pour in their thoughts.

* – Thanks our reader Hemant Bhatia for bringing this to our notice.