Don’t get surprised by title! Let’s begin our journey by understanding of this jargon word.
Let me give you an investment proposal-
How about you giving me Rs. 1lakh- every year for the next 15 years and I will give back Rs1 lakh to you every year from the 16th Year till the time you are alive. Sound Confusing!
Let’s me allow to make proof the same as you are paying me Rs1 lakh every year, assume like all prudent and rational investor you do the investment in the beginning of the year. Now I am a very poor fund manager and decide to put the funds in the instrument that gives just a return 8% p.a. compounded annually. You don’t require Fund Manager to give you 8% p.a., even a layman like me can manage it. So after 15 years the corpus will become Rs. 29,32,430. So this corpus of yours is held with me, I am your company to whom you have given Rs1 lakh every year.
Now it’s Payback time as promised!
So since you are a rational investor, I am also rational fund manager I will not keep the funds with me at home. I would rather invest this amount Let’s assume that, if I reinvest your money i.e. Rs. 29,32,430 into a product that say gives a 4% as I have become ultra conservative now. So the question is how long I can pay you Rs1 lakh/- as promised. Yes, I can pay you throughout your life and beyond.
Your Principal is held with me and all I am paying you is interest on that, do a back of the envelop calculations of that. That comes to around Rs. 1,17,300 p.a. and I need to pay you only Rs1 lakh p.a., so imagine you have given your principal to me and all I am returning back to you is out of the interest amount and still retaining Rs. 17,300 p.a. with me and I can continue this for infinite years, if I put the money @ 4% p.a.
Even if, I provide you with a marginal life cover of Rs10 lakh, the cover will begin after the paying term ends and you have to pay the entire amount, the institution will still stand to gain.
People happily buy these products. And say that they are rational investors.
So how about a Product that says, if the principal would also yours on maturity. So sounds better than the above proposition right. Such a product is the humble “Public Provident Fund”. But, it does not offer any Life Cover.
A PPF (Public Provident Fund) account as it’s called is one of the best ways to do the asset allocation towards Assured return products. Because of compounding you money will grow to a big amount.
Now, you already understand that how PPF account becomes powerful public fund which is a useful financial investment avenue that can really help you build wealth over the long term, and is not just tax saving tool. It’s a “wake up call” to open this wonderful product, but may be you don’t know about rules and other features of the PPF account – those that work for you and also those that you need to watch out for!
In the next article, you will learn all the details about taxability benefits, interest rates, withdrawals, loans, documentations that you should know about nomination procedure and much, much more!
Latest posts by Suresh Kumar Narula (see all)
- Why we should shun investing in Mutual Fund NFO? - April 29, 2019
- Not to worry current losses in equity investing! - March 2, 2019
- The Secret of Goal-based SIPs? - October 26, 2018
- Do not invest based on returns, rather than goals! - May 18, 2018
- Gold is not bold anymore - April 17, 2018