Your child’s money? Stay away from PPF!

It is customary for people to give sane advice- if you have a kid, the kid should have a PPF account. This advice makes very little sense. 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. So for most people I know PPF is insignificant.

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).

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…you know what I mean.

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.

Let me share what I did with my wife’s money. She changed jobs – and her earlier job started payin her a pension. I invested that in Templeton India Pension Plan. Over the last 4-5 years that has become a SIP – and the returns are in the region of 14-20% p.a. Surely if it does underperform over the next few years, it would surely have outperformed ppf. QED.

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