Tax saving is one of the key components of smart investing. Your portfolio must have good tax saving choices along with other may be riskier assets.
PPF is a retirement-oriented government scheme and one of the best tax saving instruments available to investors. The rate of interest earned on a PPF is pre-fixed and set by the government. Hence, returns on a PPF account are not linked to any market or economic fluctuations.
It is one of the safest forms of investment since it has the guarantee of the government and gives assured returns. This guarantee is called a sovereign-backed guarantee. This means it has the government's assurance on the principal as well as interest amount based on a fixed rate.
It was introduced by the National Savings Organization in 1968 and currently offers an interest of 7.1 percent to its investors. However, this rate is revised by the government every quarter.
PPF has a lock-in period of 15 years, which is also one of the major drawbacks of PPF. However, partial withdrawals are allowed after 7 years while after 5 years, you can close the account in case of an emergency.
Its rate of interest is on the higher end as compared to other saving instruments like Fixed deposits, National savings schemes, etc. Not only is it a safe form of investment but it also offers decent returns due to the power of compounding in the long run.
PPF investors are eligible for tax deductions up to ₹1.5 lakh under Section 80C of the Income Tax Act, 1961. The interest earned by a PPF is also completely tax-free.
So suppose you invested ₹1.5 lakh in a PPF, how long will it take to double your investment. Experts use the rule of 72 to determine this.
What is the Rule of 72?
The Rule of 72 is an easy way to determine how long an investment will take to double. However, to apply this method, the investor has to use a fixed rate of return. Also, it is only possible to calculate a lump sum amount and not SIP.
So in this rule, you divide 72 by the rate of return provided by the instrument. Given a fixed rate of return, dividing 72 by that rate can give investors a rough estimate of how many years it will take for their initial investment to double.
For PPF, the current rate of return is 7.1%.
Taking that into account, 72/7.1 = 10.14.
So for any lump sum amount deposited in a PPF account once, and if the rate of return stays 7.1%, then it will take roughly 10.14 years for your investment to double.
One must note that this works only for schemes involving the power of compounding and not with simple interest. Also, it will not be accurate for investment instruments whose rate of return is fluctuating like equity mutual funds or stocks.
Similarly, for any instrument with an interest rate of 10 percent, it will take 7.2 years (72/10) to double the investment.
More than calculating the years it would take, this rule can also be used to determine which financial instrument you can use to fulfill your financial goals.
Say you need to double your investment in 5 years. So using this rule, you should invest in an instrument that gives you a consistent rate of return between 14-15 percent for 5 years. Such an investment will most likely double your money in your given time frame.
72/x = 5
x = 72/5 = 14.4
While this rule can benefit investors, one should not blindly follow it. It is important to properly research and view past performances of investment instruments before investing in one. PPF has been one of the most popular and safe investment instruments for a long time. Even though it will take longer for your money to double in a PPF account, your money will remain safe with no associated risks at all.