Investors think of the Public Provident Fund as an old, reliable and assured return option. It is an illusion as you are losing out on a large chunk of money which could be made if you invested through Equity (nearly 21 lakhs).
Let us explain how:
If you have been investing in PPF and plan to continue investing Rs 1.5 lakh annually for 15 years (because PPF investments have a lock-in of 15 years), you will garner Rs 43.98 lakhs, at 8% return (present scenario).
However, if you invest the same amount, for the same duration in even one of the worst-performing Equity Linked Savings Schemes, or ELSS, you would happily yield Rs 65.8 lakhs.
If people invest in PPF for saving tax under 80C, their investment horizon would be for 15 years, and need to contribute on a constant basis. When you look at the average returns of 10 years in Equity Mutual funds, it is nearly 10 percent which is 2 percent superior to PPF returns.
Furthermore, if you have a look at a 15 years data in Equity Mutual fund, then the worst performing funds too in 15 years has a record of 12-13% returns, including the ups and down of the equity market.
Another challenging fact about PPF is that its rate of interest is not fixed. It keeps on changing on the basis of the rate fixed by the government authorities, and and it applies not only with the new contribution from the date of the new rate, but also with the overall accumulated contribution so far.
In case your rate of interest comes down from 8% to 7.9%, it will apply to whatever you have accumulated till that date.
The logic behind it? “If the government can borrow at 10-year G sec at 7.30% then why would they pay 7.80 or even 8%”
The frequency of changing rates in PPF is evident in the graph below:
Having said that, PPF still should be definitely be part of one’s debt portfolio. But PPF alone is not enough for your core investment portfolio if you want to garner returns along with saving tax.
Why is our previous generation biased towards PPF?
- The contribution made was eligible for income tax deduction
- The returns were decent (12% till year 2000, as compared to 8% now)
- Even the maturity amount is tax-free
Then why choose ELSS?
If you are willing to invest for long term (i.e, 15 years), why not invest in ELSS which gives better returns rather than investing your money for debt-like returns?
PPF account has a maturity period of 15 years, so it would be ideally aligned with long-term goals which are at least 15 years away, such as one’s retirement. Also, we understand that while investing for long-term goals, we should invest more in those assets which give higher returns and be more than a mere tax saving instrument.
If not completely, then at least one big part of our investment should go to ELSS. Short-term volatility should not be an excuse to avoid an asset, which gives higher returns in long-term.
Bottomline: If you are capable to stomach some market fluctuations, then you should have higher exposure for equity (ELSS) because it provides better return in long term which is necessary to make a healthy corpus.
And also, for a long term, in equity, it has a potential to beat inflation and creating wealth. And remember, investment should be made as per the goal requirements, suitability of asset allocation and not just because of tax considerations, and ELSS is an answer to all three!