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.
You can reach me at firstname.lastname@example.org.
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