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

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?).

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

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
  1. You are ready to invest 25K every month NOW.
  2. You don’t have any liabilities NOW.
  3. Your income (salary, etc) will increase every year for next 25 years.
  4. 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.
  5. 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.
  6. You and your family are adequately insured.
  7. You and your family have adequate health insurance.
  8. 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
  1. 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.
  2. 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).
  3. 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.