PPF will not make us crorepatis! We need to take risks for that!

Published: June 18, 2021 at 10:23 am

You may have come across articles in your news and discover feeds on “how to become a crorepati with PPF”. There is only one reason such articles get written: for traffic. “PPF” in itself is an attention grabber. Add the emotional hook “crorepati” to it then it is a magical combination. It is possible to aim for greater visibility by being pragmatic. Here is why PPF will not make us crorepatis.

If you notice,  all these how to become a crorepati with PPF (or EPF) articles make the same wrong assumptions: They assume that the PPF interest rate will remain the same – not for 15 years but 25, 30 years! Now, we all know what would be the PPF current rate if a certain “celestial event” did not occur in April! For those with foggy memories, it would be 6.4% and not 7.1%!

So there is simply no chance of PPF rates being the same over the next 25,30 years.  More importantly, these articles assume it is “ok” to become a crorepati over that long period.

If your portfolio is loaded with “secure” fixed income and can invest quite a bit more than the current PPF investment limit of Rs. 1.5 lakh per financial year, if you take three decades to get to your first crore, you are really not a crorepati. Inflation would have reduced its value significantly.

We have already discussed that Rs.1000 in 1980 is only worth Rs. 63 in 2021! In other words, one crore may be a large emotional sum for you in 2021, but with just 5% inflation, it will be devalued to effectively Rs. 28 lakhs after 25 years.

So even if the PPF rate remains the same at 7.1% and you keep investing 1.5 lakh in April of each year, it would take you 26 years to hit one crore.

150000*((1+7.1%)^26-1)/7.1% = 1,04,58,015

Sure, they might increase the investment limit to Rs two lakh or even three lakh down the line, but it will not change the main problem: It simply takes too long to become a crorepati with fixed income!

Trying to get rich quickly is a bad idea, but trying to get rich too slowly is also a bad idea!. Most investor portfolios are loaded with debt. A young earner today should strive never to make that mistake. I would have not reached the threshold of financial independence in 11 years (age 32 to age 43) if I had not taken on investment risk: My journey: driven by the fear of making the same mistakes again.

If you can invest Rs. Six lakh per year, you can build a much higher corpus over 25 years with a 50% equity and 50% fixed income portfolio with simple maintenance like rebalancing. If they can increase the rate at which the investments grow each year, it would be even better – this is the key to building wealth: What is your investing growth rate?

The point is, it should take about 15-20 years to become a crorepati. This is impossible with fixed income like PPF and EPF (especially with current EPF tax rules) unless you have a ton of money to invest.  With 5-7 crores required for normal retirement, we cannot afford to take any longer! We need to take on investment risks!

Risk-aversion is also rich-aversion!

Has anyone become a crorepati via PPF?

Now, let us project the past instead of the future. Has anyone touched one crore via PPF alone? The answer is, it is possible but not probable. Thanks to Ragesh and Kapil Tiwari at FB group Asan Ideas for Wealth, I obtained PPF investment limits in the past. Source: TaxGuru

  • Rs. 30,000 from 2nd March 1979. Rs. 20,000 before that.
  • Rs. 40,000 from 16th Aug 1983.
  • Rs. 60,000 from 23rd June 1986
  • Rs. 70,000 from Nov 15th 2002
  • Rs. 1,00,000 from Dec 1st 2011
  • Rs. 1,50,000 from 13th Aug 2014

Combine this with PPF interest history, and we can estimate how long it took to hit one crore PPF corpus in the past.

Year PPF was started.Years it took for PPF corpus to grow to one crore

Regardless of interest rate changes and investment limit increases, it took about three decades to hit one crore! This is assuming someone can invest the entire investment limit by April of each year.

How many people could pull that off in the past – in the ’80s and ’90s?  Even if the account is three decades or older, consistently investing the max possible amount each year and never withdrawing would be quite rare.

In summary, we must first learn to think bigger than the emotional landmark of one crore – we need a lot more! Second, we need to take on considerable investment risk when young to have a shot at getting rich and staying rich. Can we do this systematically without getting distracted by the noise in social media and, in particular, this website and without immediate reward? This would determine how wealthy we get in future.

If you wish to  get started the right way, here is a seminar: Basics of portfolio construction: A guide for beginners

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