POSTED BY February 7, 2012 2:00 pm COMMENTS (41)ON
I would like discuss this article with the below questions. I strongly believe no product can match the PPF and gives the benefit of Power of Compounding. I think savings through PPF for more than 25 to 30 years for our retirement needs is the best way to do that. what do you think ? I am surprised why no one notices this and promotes this concept. 🙁
Q1) I am wondering where is the concept of compounding comes in SIP and it works just based on the Rupee Cost Average rule only. I think Reinvesting the profit / interest is NOT considered as Compounding. SIP yields good returns because of the volatility nature of equity markets. This gives best returns only if there is extreme volatility and if the market goes with minimal volatility you end up in less profit. Also even in SIP we need to make a close monitoring and come out of it once we reaches our targeted returns. Otherwise there is chance that our profits will get eroded in a quick time and you need to wait minimum 3 to 4 years for the Rupee Cost Averaging happens again. I personally experienced this. No mutual fund company declares interest compounding interest annually like PPF.
Q2) On the other side if you take PPF this removes all of the above issues like close monitoring etc and I believe only PPF alone gives the real benefit of compounding besides tax benefits. No other instruments exists to match this. Do you think any other financial instruments / methods exists to give the same return as if i invest Rs 1000 every month for 25 to 35 years in PPF continuously.
Q3) Also is there is any mutual fund exists for more than 25 years like PPF? The reason behind this question is i have seen many good funds like Magnum contra , reliance vision , growth are all considered to be the best mutual funds across the globe but if you see their current ratings it all dropped to three str ratings. I am not sure whether the fund houses will keep them or close them in next few years. So even it i performs the power of compounding may get abruptly get closed by the fund houses. But in PPF the probability of happening this would be very less and this scheme exits already for more than several decades.
I sincerely request you to validate my thoughts and provide clear directions on this topic with your detailed analysis separately for each question.