PPF vs. mutual funds: which is better?
The article presents a historical analysis of investing in stocks vs. PPF since 1979.
The article presents a historical analysis of investing in stocks vs. PPF since 1979.
Many investors wonder which is a better option for long-term investment: Public Provident Fund or investing in the stock market via mutual funds.
An updated version of this article for the latest year is presented here: The latest result of PPF vs. SENSEX.
We run a simulation using historical data to check which option has been better. The simulation takes the case of two individuals
In this article, we will show the results of running a 15-year investment in PPF vs the Sensex (to represent stock investing via mutual funds) in this way:
We did not have mutual funds in 1979, but we have today, and not having mutual funds in the 1970s does not invalidate the conclusions below.
Using data from National Savings Institute, we plot the historical interest rates and limits of PPF investment since 1968.
Some observations:
We will invest the same amount at the beginning of the month in PPF or Sensex. The amount is 1/12th of the investment limit of PPF that was allowed at that time. Since PPF interest is calculated on the minimum balance between the 5th and the end of the month, this method maximises the interest we can get via investing monthly in PPF. The interest rate taken is the actual PPF rate in that period. We also use the actual Sensex returns for the final portfolio value over the period.
The result shows that in most of the 300+ cases in this simulation, Mr S, the stock investor, comes out ahead. Only in some extreme market events, like the post-Harshad Mehta years, the 2008 global financial crisis or the 2020 COVID-19 crash, did the PPF portfolio do better in 18% cases.
In this chart, we see how the returns of the PPF investment have risen and later fallen with PPF rates while that of the Sensex investment has been unpredictable.
We should keep in mind the following points while concluding anything from this analysis:
Can we use this data to say that āstocks are usually better than PPFā? That is mostly true. However, PPF has some benefits like guaranteed tax-free returns that stocks do not have.
We should not construct a portfolio for long-term goals only with stocks since we have shown before that the end result of such a portfolio is unknown. The better option is to create a portfolio with both debt and equity as asset classes and rebalance between the two per an appropriate glide path.
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This post titled PPF vs. mutual funds: which is better? first appeared on 08 Jun 2022 at https://arthgyaan.com