Satish asks, “Sir, I am 24 years old and will be receiving my first salary in Aug 2022. My basic pay is close to Rs. 35,000. The gross pay is about Rs. 63,000. The take-home after TDS and EPF deductions is close to Rs. 50,000. I need to give Rs. 10,000 to my parents each month and pay Rs. 8000 rent. I am trying my best to keep my expenses as low as possible.”
“Somehow or other, the expenses have climbed up to Rs. 20,000 a month. I am therefore left with only Rs. 12,000 each month to invest. My parents are pushing me to open a PPF account while I would like to invest in equity mutual funds. Please help me convince them”.
I don’t think we can help you convince your parents, but let us try and convince you (if you have any residual doubts). Then the rest is up to you – your money, your choice, your life.
The “EEE” fascination associated with PPF is hard to beat! EEE refers to tax “exemption” at three stages: investment (80C), interest and maturity amount. However, investing as much as possible in PPF guarantees a return below inflation (real inflation, not the ones put out “officially”).
See:
About 60% of the total amount you can invest (including EPF deductions) should be directed towards equity – a Nifty or Sensex index fund is the simplest choice. If the remaining 40% comprises EPF deductions, then there is no need for PPF in the portfolio.
In Satish’s case,
- EPF deduction is Rs. 7151 (employer + employee, excluding EPS contribution)
- Then as a thumbrule, he must invest 1.5 times this amount in equity or about Rs. 10,700.
- He has only Rs. 12,000 to spare. Leaving some margin for emergencies and variations in expenses, he will not have any amount to spare for PPF, and that is a good thing!
But what about tax saving?! The worst financial mistakes are made by focussing on saving tax. We recommend that Satish use the new tax regime and get rid of worrying about “maximising 80C benefits” and harming his portfolio.
No, ELSS mutual funds are just as unnecessary as PPF! The new tax regime allows us to create a simple and most effective long term portfolio with EPF and a simple index fund.
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Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation for promoting unbiased, commission-free investment advice.
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