Be it for a child, or for an adult, the Public Provident Fund (PPF) can build a significant corpus of money for the disciplined investor. Currently, the instrument offers 7.1% interest which has got a sovereign backing.
The most significant point is that a parent can open a PPF on behalf of a minor and start contributing for the financial security of the child. Since it starts in the early years, it can lead to a significant corpus over the years.
Extend the investment horizon
The biggest factor that facilitates such a capital accumulation is the fact that one can keep investing for any period of time. Though the PPF has an initial lock-in period of 15 years, it can be extended by multiples of 5 years, which means one can invest for even 50 or 60 years at a stretch.
Calculation with Rs 60k/year
Let’s see the calculations. Assume a person begins investing Rs 5,000 every month from the age of 25, when he/she beings earning. After the first 15 years, the initial lock-in period, it would accumulate Rs 16,27,284. Remember, the interest component in this amount will be Rs 7,27,284 on a principal of Rs 9 lakh.
Calculation with Rs 72k/year
If this monthly contribution is raised to Rs 6,000, the principal being invested would rise to Rs 10.8 lakh and the interest would come to Rs 8,72,740. Therefore, the amount after 15 years would turn into Rs 19,52,740.
Calculation with Rs 84k/year
What happens if the monthly contribution is increased to Rs 7,000? In this case, the total amount after 15 years would amount to Rs 22,78,197 – a total investment of Rs 12.60 lakh would generate an interest of Rs 10,18,197.
Calculation with Rs 96k/year
Consider the investor raising the monthly contribution to Rs 8,000. The total amount would rise to Rs 26,03,654 in this instance. The nominal principal of Rs 14.40 lakh would earn a total interest of 11,63,654.
One has to remember that if one continues the investments beyond the 15th year, the amounts can rise to far higher levels. The other point to remember is the complete income tax benefits (on principal, interest and the maturity amount) in PPF. However, the tax benefits are now available in the old income tax regimes.
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