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PPF vs. mutual funds: which is better?

08 Jun 2022 - Contact Sayan Sircar
5 mins read

The article presents a historical analysis of investing in stocks vs. PPF since 1979.

PPF vs. mutual funds: which is better?

Many investors wonder which is a better option for long term investment: Public Provident Fund or investing in the stock market via mutual funds.

Table of Contents

We run a simulation using historical data to check which option has been better. The simulation takes the case of two individuals

  • Conservative investor Mr P who invests monthly in PPF
  • Risk-taking investor Mr S who invests the same in a (hypothetical) Sensex index fund

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 use historical interest rates and annual limits of PPF from 1968 till date, along with Sensex data from 1979
  • we run a 15 year or 180-month simulation multiple times: from Mar-1979 to Mar-1994, Apr-1979 to Apr-1994 and so on. We choose 15 years since that is the maturity period for PPF
  • we do not exit the portfolios after 15 years, and hence there are no taxes on selling

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.

Historical interest rate and investment limits of PPF

Using data from National Savings Institute, we plot the historical interest rates and limits of PPF investment since 1968.

Historical interest rate and investment limits of PPF

Some observations:

  • PPF rates before the 1980s were below the levels of today
  • will PPF rates go lower from the current levels: history shows us that it has been a lot lower, and there is no reason why it cannot go a lot lower
  • there was a long period of 15-ish years (Apr-1986 to Jan-2000) where interest rates were their highest, i.e. 12%. If you have a longing for those rates, do remember the condition of the economy in the same period
  • PPF investment limit has been rising over the years and is currently capped by the same ₹150,000 limit as Section 80C tax deduction

Making a monthly investment in stocks vs PPF

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.

PPF vs mutual funds for 15 years

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.

XIRR of PPF vs mutual funds for 15 years

In this chart we see how the returns of the PPF investment has risen and later fallen with PPF rates while that of the Sensex investment has been unpredictable.

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Caveats with the analysis

We should keep in mind the following points while concluding anything from this analysis:

  • the analysis uses ~45 years of data, but that does not mean that the trends seen in the past will repeat in the future
  • the data shows the price return of the Sensex. If we add dividends, the Sensex returns will increase by 1-2% per year. Some active mutual funds with sufficient long history may have beaten the Sensex over most of these periods and hence do not change the conclusion
  • a “dumb” SIP in stocks is unpredictable, and returns vary considerably based on the ending point of the 15 years. Instead, the right way to follow goal-based investing and reduce equity allocation as the goal comes closer
  • we exclude the tax benefit under 80C for the PPF investment since it is straightforward to max out the ₹150,000 limit using other eligible investments

Can we use this data to say that “stocks are usually better than PPF”? That is mostly true. However, PPF has some benefits like guaranteed tax-free returns that stocks do not have.

Does it make sense to invest in PPF?

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.

In that case, does it make sense to invest in PPF at all? We will cover that aspect in a future article.

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