Many of us have PPF account. But we fail to understand the simple tricks like when to invest in PPF to get higher returns. Today I am going to share with you one simple thing about PPF which you might not noticed during the opening of your PPF account.
Interest for a particular month is calculated on the lowest balance between the close of the fifth day and the end of the month. This accrued interest will be credited to the account at the end of each year. It means if you want to have a benefit you need to invest your monthly contribution within the fifth of every month. Else, your contributed amount will be eligible for gaining interest for the next month. Therefore, if you contribute after fifth of the month then for one month that amount will be idle.
I will show you with illustration that how you can maximize your returns by simply following the above condition of interest calculation.
Suppose Mr.X and Mr.Y opened PPF account on same day and started to contribute Rs.8,000 each month but Mr.X is contributing before 5th and Mr.Y is contributing after 5th of each month then how much difference we can see.
Mr.X’s Accumulation after 15 years.
First Year Contribution is Rs.8000 PM.
1st Month Contribution-8,000+688 (interest for 12 months) =8688
2nd month Contribution-8,000+631 (Interest for 11 months) =8631
Like this at the end of 1st year Principal is (8000*12) + (4472) =1,00,472. The same amount will be his contribution for the remaining 14 years. So, at the end of the 15th year, his accumulated amount is Rs.25,39,929.
Mr.Y’s Accumulation after 15 years.
First Year Contribution is Rs.8000 PM. (But after 5th of each month)
1st Month Contribution-8,000+630 (Interest for 11 Months) =8630
2nd Month Contribution-8,000+573 (Interest for 10 Months) =8,573
Like this at the end of 1st year Principal is (8000*12) + (3,784) =99,784. The same amount will be his contribution for the remaining 14 years. So, at the end of the 15th year his accumulated amount is Rs.25,22,536
The difference of returns between Mr.X and Mr.Y is-Rs.17,393.
But you may say, what is the time value of this difference after 15 years?
It may be your one month’s household expenses what you are paying now. How is it?
Suppose today you have some household expenses Rs.7,257 PM then the future value of that will be Rs.17,393. (Inflation-6% Tenure-15 yrs).
Therefore, what I mean to say is, with simply following your monthly contribution before the fifth of every month you can get higher returns. Hope this point may add value to your saving 🙂