You want to maximize returns by investing in the Public Provident Fund (PPF). This government scheme, with a guaranteed interest rate of 7.1%, is considered exceptional for a safe, long-term investment. However, most investors don’t realize that investing in PPF monthly or as an annual lump sum has a significant and direct impact on their overall returns.
Investing in PPF
There are two main methods for investing in a PPF account: either you deposit small installments every month, or you deposit the entire amount in one lump sum at the beginning of the year. The maturity amount varies between these two methods, primarily due to the interest calculation date.
Interest Calculation Rules
Interest in PPF is calculated on the lowest balance available between the 5th of each month and the end of the month. If you deposit ₹12,500 every month, you’ll earn interest for that month. This regular process compounds every month. If you deposit the entire ₹1.5 lakh lump sum at the beginning of the year, interest accrues on that amount for the entire 12 months, increasing the total interest and maturity amount.
Returns in Investment Methods
Let’s compare returns based on an annual investment of ₹60,000 (assuming the current rate of 7.1%):
Calculating Monthly Investment
If you deposit ₹60,000 in 12 monthly installments (i.e., ₹5,000 per month), your total investment will be ₹9 lakh in 15 years. You’ll earn interest of ₹6,77,840. Thus, your total maturity amount after 15 years will be ₹15,77,840.
Calculating Annual Lump Sum Investment
In contrast, if you deposit a lump sum of ₹60,000 at the beginning of the year, you will earn exceptional interest of ₹7,27,284, and the maturity amount will grow to ₹16,27,284.
It’s quite clear that making a lump sum investment at the beginning of the year can yield you approximately ₹49,444 more profit than investing monthly.
Investment Rule
To earn maximum interest, you should pay special attention to the 5th of every month. If you deposit your monthly installment or annual lump sum on or before April 5th, you will receive interest for that entire month.
For example, if you deposit the entire ₹1.5 lakh on or before April 5th, you will earn an interest of ₹10,650 (at a rate of 7.1%). However, if you deposit the same amount on or after April 6th, you will not receive the full interest for April, and your interest income will be reduced to approximately ₹9,762.50. Therefore, it is most beneficial to deposit the first installment of the year between April 1st and April 5th.
Long-Term Terms and Extensions
The PPF scheme matures in 15 years. However, if you wish to continue investing, you can extend it an unlimited number of times in straight blocks of 5 years each. This is an exceptional long-term investment option where the interest rate is reviewed quarterly, but it is currently fixed at 7.1%.