Inflation risk and PPf!

It is customary for people to say “I do not take any risk in equity markets” all my money is in PPF. Let us look at what are the risks involved in investing in PPF.

First of all most of the people I meet today invest far, far more in a year than the max possible amount of Rs. 70,000 in a PPF account. If you do invest in PPF – say 70,000 in 4 accounts, you have Rs. 2.8 Lakhs invested over a long period of time, your risk is high. If this is a significant portion of your portfolio re-consider your portfolio allocation.

Secondly in a growing economy inflation is a real danger – and most people do not understand this risk. Why people do not understand this risk is of course innumeracy. It takes a complicated mind to understand simple things like compounding (inflation is negative compounding). If inflation stays at an average of 10% you are losing 2% per annum on your contribution to ppf alone!

Though strictly speaking there is not too much to worry about a soverign default, there is a serious risk that an ambitious finance minister will delay the return of your money. Let us say P Chidambaram decides to pay you in 10 instalments – yes alongwith interest, but…

So sorry for being a party pooper. If you have a 16 year view (or 20) put your money in a plan with say 90% of the money in equities and 10% in debt. Rebalance every 3-4 years. Surely you will outperform a PPf.

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4 Responses to “Inflation risk and PPf!”

  1. Ravinder Makhaik on June 27th, 2008 at 11:57 am

    My take to is on equities up against debt. But the ratio of 90:10 appears high.

    Especially as getting into the equity market is not everybody;s game.

    The more you indulge it, the more complicated it appears but the end result I would agree with.

    Returns should end up better than PPF would accumulate to.

  2. each person should choose his / her own portfolio mix. For a 20 year view, I still stick to this ratio. A review should be done every 4-5 years. I hope u remember all the gray hair that I have. It is by worrying about guys who think equity is risky and debt is safe. Like a friend’s father (he was a pilot in Air India). I was flying at a time when flying was considered dangerous and sex safe!

    So sir having spent enuf time in the equity markets, I think in the long term in a growing economy debt is risky and equity safe. In the short term, debt is safe and equity risky

  3. This is the reason I always suggest my friends to invest in ULIPS and choose sweep options.

  4. Putting all your eggs in one basket is a big blunder no matter how strong the basket may be..

    The same applies for Investments as well… Putting all your money in PPF and ignoring the Equities Market is a blunder.. Equitites may not be performing right now but over a period of time, their returns would certainly outpace the returns from Debt

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