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Invest in PPF: Sooner, rather than later

Invest in PPF: Sooner, rather than later

Don’t waste your time on other investments if you haven’t begun putting money aside in Public Provident Fund. And as the returns are compounded, the sooner you do so, the better.

The Public Provident Fund (PPF) is a remarkable savings tool. It earns a decent return, currently 8.7%, is completely tax-free up to Rs1 lakh, and even though your money is locked up for the first 15 years, you can withdraw it partially after the fifth year. But it’s best you leave the money untouched. This is because PPF relies on the power of compounding to provide a large retirement corpus. Leaving the money in for longer would, therefore, have a more pronounced effect than you would expect.

Earlier the better
PPF takes advantage of the power of compounding. Theoretically, compounding is simply reinvesting an amount year after year. If this is done over a long period of time, though, the absolute returns are substantially higher than expected. Here’s an example:

Age Monthly Investment Growth rate Corpus
25 Rs5,000 8.70% Rs1.37 crore
35 Rs5,000 8.70% Rs53 lakh
45 Rs5,000 8.70% Rs18.5 lakh

As you can see in the example below, if you start pushing aside Rs5,000 a month at age 25, you would have Rs1.37 crore in the bank, as compared with just `18.5 lakh, which is well under 20% of the amount, if you start at age 45. This means that the amount grew over seven times faster in a little over two times the tenure.

Have you any idea how much you would need to put aside to build a corpus of Rs1.37 crore in just 15 years, assuming a return of 8.7%? The answer is Rs37,000, over seven times the original amount.

In the example above, money is invested every month. For best results with PPF, invest the full Rs1 lakh in April, as the full sum will be compounded twice in that year.

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