There are times when people overestimate the ability of basic guaranteed rate of return plans to build a sizeable retirement portfolio. By guaranteeing you receive the promised interest and protecting your principal, these programs offer significant benefits. Retirement planning is easier because you know exactly how much your investment will grow over time. One of their biggest advantages is that plans like Public Provident Fund (PPF) require little intervention. You plant and let it grow.
The magic of combining, i.e. consistency
Consistency is the key to growth and this certainly applies to guaranteed return programs as well. Assuming you start investing at age 30, investing is rampant and regular ₹1,50,000 per annum can amount to over a crore of pension corpus value till the age of 60 years. While it may seem unrealistic, the magic of compounding ensures that money will grow on top of money, which means you will earn interest on your first investment that you also earn on your interest income.
For the uninitiated, continuing investing in guaranteed rate of return programs can be a powerful vehicle for accumulating retirement wealth. The power of connection should not be underestimated. Compound interest is equivalent to the reinvestment of profits, allowing you to earn interest over the long term. This increases the growth of your money over time. The emphasis is on the term “long term,” which suggests that you must be willing to wait and give your money the required time to watch it grow.
You can invest in PPF for as little as ₹500 and that’s it ₹1.50 thousand annually. The plan matures after 15 years, excluding the taxable year the account is opened, with an annual interest rate of 7.1%. Compared to market-linked investments, interest rates provide greater security, despite potential annual fluctuations.
PPF promotes long-term savings with a 15-year maturity period that can be extended every five years. This suggests that you will be investing in the same fund for the next fifteen years, which will enable your corpus to grow to a sizeable sum. This is especially useful when planning for retirement because it allows you to gradually build a sizable staff.
The illustration below helps explain how your money grows slowly and steadily over a period of time
Annual investment: ₹1,50,000
Investment interest rate: 7.1%
Investment period: 30 years
Totals
Amount invested: : ₹45,00,000
Total interest: : ₹1.09.50.911
The value of maturity: : ₹1,54,50,911
So, within 30 years, it will be possible to obtain crorepati status (with a corpus exceeding Rs 1 crore) only through PPF.
Enjoy tax benefits as you grow
Apart from being a popular pension fund, PPF scheme offers up to ₹1.50 lakh tax benefits under Section 80C of the Income Tax Act. This can significantly reduce your taxable income and result in significant tax savings.
But even at an interest rate of 7.1%, inflation can gradually erode the purchasing power of your money. Thirty years from now, a crore may not be worth as much as it is today. Therefore, apart from PPF, it would be wise to consider diversifying your portfolio with higher growth investments. This could be in stocks or mutual funds, but remember to consider your risk tolerance.
Posted: May 30, 2024 10:24 am EST
