With the 50 bps cut in the repo and reverse repo rates announced by the RBI, fixed deposit rates in banks are likely to get revised downwards soon. No one really looks at bank fixed deposits as part of retirement planning anyway, since there are no tax benefits on the principal or the accrued interest.
For those who have recently entered the work force – whether in a job or a business - retirement planning may not be the top priority right now. But it should be. That is the best way to let the magic of compound interest work in your favour. The sooner you start saving and the longer you stay invested, the more money you will accumulate.
In this month’s guest post, Nishit extols the virtues of investing regularly in the PPF scheme to help accumulate a tidy amount after retirement.
Today we re-visit a very old, boring and vanilla investment instrument called the Public Provident Fund (PPF). PPF is a Government of India scheme which is deployed through PSU Banks, post offices and some of the Private Banks.
The money is safe as per the Sovereign guarantee and cannot be attached by anyone even if someone is declared bankrupt. The proceeds are tax free and the amount invested is also tax free.
The last year brought about two very important changes in the PPF scheme: (1) the investment limit was raised from Rs 70000 per year to Rs 1 lakh; (2) the rate of interest is floating linked to the 10 year Government bonds. PPF will carry about 0.25% more interest than the average yield of the G-Sec. G-Sec yield typically is in the range between 7.75 % and 9%. Accordingly the PF rates have gone up to 8.6% and 8.8% in the 2 years.
I have enclosed the chart of 10 year G-Sec over the past few years and for most of the times it is ruling around 8%. The government will be very careful in letting the interest rate of PPF drop below 8% since it is a very sensitive issue politically. Many of the middle class voting public of India invest in the PPF. For the sake of calculation I have taken the interest rate as 8.2%.
If one invests Rs 1 lakh (Rs 100,000) every year at the beginning of the year, after 20 years one will accumulate Rs 50 lakhs. Even if someone takes the interest rate as 8%, he will end up with Rs 49 lakhs.
PPF is definitely one of the pillars of investing for one’s retirement. The total amount becomes Rs 81 lakhs after 25 years. Now, taking into account inflation and the government dearness methodology Rs 100 after 25 years will be equivalent to Rs 500 today. So, you are left with a corpus equivalent to Rs 16 lakhs in today’s terms. That can provide a decent monthly income of Rs 12000 in today’s terms.
The other pillars of investment will be your equity portfolio and other savings. PPF is a simple, straightforward and tension-free way of preparing for one’s retirement.
The following table indicates the amounts accumulated after every five years:
| Year | Amount invested at the beginning of the year (Rs) | Interest earned at the end of the year (Rs) | Total amount accumulated (Rs) |
| 1 | 100,000 | 8,200 | 108,200 |
| 5 | 589,000 | 48,300 | 637,300 |
| 10 | 14,62,500 | 119,900 | 15,82,400 |
| 15 | 27,57,850 | 226,150 | 29,84,000 |
| 20 | 46,78,850 | 383,650 | 50,62,500 |
| 25 | 75,27,650 | 617,250 | 81,44,900 |
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