High risk investments – 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. Of course if you and your spouse want a deduction of Rs. 600,000 from 80 C (new section 16?) PPF may become significant.

Secondly in a growing economy inflation is a real danger – and most people do not appreciate this risk. Why people do not appreciate 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 the then finance minister decides to pay you in 10 instalments – yes alongwith interest, but…you know what I mean. Pushing PPF as a great ‘investment’ is a part of the ‘Conspiracy of the Rich’ theory by Robert Kiyosaki. If the government does not keep pushing articles showing how value is created in PPF (using power of compounding and nominal returns) how will they get money @ 8% in such large numbers? So a great con game is created, do not fall for it. Do politicians keep their moneys in PPF? Of course but it is a miniscule part of their wealth. Most of their wealth is kept in cash / kisan vikas patra / …etc. You guessed right, they can keep cash, you see!

So sorry for being a party pooper. If you have a 16 year view (or 20) put your money in a plan with say 85% of the money in equities and 15% in a floater fund. 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 paying her a pension. I invested that in Templeton India Pension Plan. Over the last 7-8 years that has become a SIP – and the returns are in the region of 14-20% p.a. Surely if it does under perform over the next few years, it would surely have outperformed ppf’s 8%.

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3 Responses to “High risk investments – PPF?”

  1. mansoor panjwani on October 19th, 2009 at 7:27 pm

    Dear subra,
    (new section 16?)
    your questions mark is justifiable.
    Actually section 80C of income Tax Act is proposed to be replaced by section 66 of Direct Taxes Code Bill 2009.
    New section 66 provides for, dedution of sum paid or deposited into account of permitted ‘savings intermediary’ during financial year, upto 300,000 rupees.
    You discuss a valid point in your article, even I myself have always avoided NSC’S, PPF’S, FD’S, and the most importantly-THE GREAT CREDIT CARDS.

  2. PPF is a very good debt based investment avenue. One can not put all money in equity related instruments. PPF scores well in returns and safety. Trick will be to start an account early in life and put the min amount needed in early years. The keep on extending the tenure by 5 years. This would be a great way to get 8.5% tax free income even in your retirement years. The only problem is that you can not add more than 70k per year. Accumulate as much as you can in your working life and enjoy the fruits after retirement.
    I have accounts on mine and my wifes names, both have completed 15 years long past and are now being extended every 5 years. There is enough flexibility for withdrawals.

  3. With all the talk about asset allocation planning, why compare PPF with equity based investment? With so few quality options available for debt based investment, PPF stands out as the best option.
    I understand the main purpose of writing this blog must have been to inform young investors that PPF should not be their main focus when starting young. PPF needs to be cultivated and looked after so that it gives a good sized return when you near retirement and have alot of money to invest. If you start late then the amount you accumulate in PPF is too small to matter. With the new DTC also PPF can be used as an option which will give tax free 8.5% returns even after retirement.

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