Many investors wonder which is a better option for long-term investment: Public Provident Fund or investing in the stock market via mutual funds. Given that PPF returns more the earlier you make the investment, many investors also try to target investing the maximum in PPF as early as possible, preferably in April.

📚 Table of Contents

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• Historical interest rate and investment limits of PPF
• Making a yearly investment in PPF vs stocks
• Making a monthly investment in PPF vs stocks
• Conclusions
  • Caveats with the analysis
  • Does it make sense to invest in PPF?

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 compare the portfolio ending values and XIRRs after 15 years
• we assume that the return from PPF is tax-free and there is a 10% tax on profits from the equity investment which is inline with equity taxation rules today

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

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

Here is another view of the same data but for every month since 1995:

Making a yearly investment in PPF vs stocks

We will invest the same amount at the beginning of the year on 1st April in PPF or Sensex. The amount will be equal to the maximum 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 Total Returns returns (Sensex price changes with reinvested dividends) for the final portfolio value over the period.

The result shows that in most of the 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 8.68% cases or 33 out of 362 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.

Making a monthly investment in PPF vs stocks

We will invest the same amount at the beginning of the month in PPF or Sensex instead of a lump sum in April. The amount is 1/12th of the investment limit of PPF that was allowed at that time per month.

Here the result improves slightly for PPF with 8.95% or 34 out of 362 cases beating the Sensex.

Conclusions

Do not rush to invest ₹1.5 lakhs in PPF by 5th April. Investing equal amounts per month should be better.

It is true that you get the highest interest in PPF the earlier you invest. However, you might be losing out a large quantum of returns in equity by not investing enough.

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 total return of the Sensex which includes dividends since 1996. Before that, we have used price return data only. Since PPF did not beat Sensex, in the period before 1996, switching to total returns in 1996 does not change the end-result
• 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.

To understand how to create a portfolio where the PPF investment amount is just right:

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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.