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What happens if you invest after 5th of every month in PPF account?

Author: Balaji Rao/Wednesday, November 6, 2019/Categories: Exclusive

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What happens if you invest after 5th of every month in PPF account?

There is an interesting rule for interest calculation that can actually eat into the overall returns that an investor makes over the duration of investing, unless the contribution does not get invested on or before 5th of every month the interest credit for that contribution for that month does not get credited in favour of the investor.

For instance, if an investor deposits the contribution on 6th of a month or later, the interest for that month does not get calculated at all and if the delay happens for more than once in a year the loss of interest can be quite high and cascading as well. This rule is in practice for ages and despite so much of progress in calculations and quants this rule beats all logic.

Moreover, in such months when an investor fails to deposit the contribution on 5th and deposits on 6th he will not only lose interest for that month from PPF but also will lose the savings account interest too which can be a double whammy. Over a period of 15 years or 180 months if the investor does not deposit the contribution 30 times at the rate of two times per year the overall loss can be as high as Rs 3 lakh.

Not only such rule is applicable for PPF, even for Sukanya Samridhi Yojana scheme the contribution has to be made on or before 10th of every month to be eligible to get the interest credit for that month. Such illogical rule has been ruining the overall returns for investors for years and anything about this hardly gets mentioned anywhere. Many investors may not even be aware of this rule and even if they are aware they have been quiet because to whom will they voice their concern to?

Now, let’s consider the charges on mutual fund through regular plans; so much of noise is made around the “losses” that an investor is supposed to incur if a “regular” plan is chosen by investing through a financial advisor. Series of calculations are shown by various newspapers and magazines showcasing the losses that an investor makes if opted for regular plan, but glaringly ignores such losses from other instruments as discussed above. There should be a level playing field and is wrong to showcase the negativity of only one product because someone has vested interest to sell “direct” plan mutual funds.

Moreover, there are empirical evidences that proves that if invested in equity mutual funds for such long periods (15 years) the returns have been quite encouraging (at least 12% CAGR in diversified funds) which offers a great arbitrage even if the net returns is lesser after expenses are paid as a fee to the advisor.

Make no mistake, while investing in PPF may not require the assistance of a qualified advisor, but investing in mutual funds does require the assistance of an advisor. The fee paid in a mutual fund by choosing a regular plan makes sense because self-advice done and wrong choices of funds made today might ruin the long term gains.

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