For a lot of investors, giving up on the guaranteed returns of PPF for the promise of ELSS is a difficult decision. Of course, this excludes those whose mandatory contributions, like EPF, fill up their Section 80C limit and therefore this dilemma doesn't even arise. But for others, a combination of government guarantee, returns which are among the highest offered by small savings scheme, and a tax-free status appears too lucrative a proposition to trade away. Many of them ask why ELSS is our de facto choice for tax saving investments and not PPF. Well, the simple answer is that over an investment horizon, as long as that of PPF, which is 15 years, ELSS can do far better. Sure, PPF offers guaranteed returns which ELSS does not, but those are almost guaranteed to be lower returns than ELSS. Here are some numbers that provide pretty convincing evidence. Look at graph Number of ELSS outperforming PPF which shows that if you pick any block of 15 years ending in the last decade, you will find that an overwhelming majority of ELSS funds have beaten the returns of PPF. And that's after adjusting for a 10 per cent long-term capital gains tax in case of ELSS. This is not based on a cherry-picked list of best performing ELSS funds, but includes each of them that has had that long a performance history. What do these numbers tell? Firstly, the choice of an ELSS fund wouldn't have mattered much when it comes to opting between ELSS and PPF. Even if you had ended up investing in a relatively poor performing ELSS, there is a very high chance that you would have still earned more returns than PPF. Secondly, the magnitude of outperformance of ELSS funds itself has been substantial. An average ELSS fund has outperformed the PPF by an average margin of over 5.5 per cent per annum in any 15-year period ending in the last five years. For someone investing Rs 1.5 lakh every year over a 15-year period, that translates into earning Rs 33.5 lakh more! Clearly, the opportunity cost of opting for PPF over ELSS is massive. Therefore, if you are willing to shed your inhibitions for the daily ups and downs in the investment value, which is bound to happen in case of ELSS, the choice is obvious. So there you have our answer to the PPF vs ELSS debate. But there are some other questions that quite a few of our subscribers have been asking. Let's address them. What about NPS? Well, NPS is also a viable option for your tax-saving allocation and their Tier-1 equity plans have been able to deliver some pretty good returns over the 10-year period. NPS Tier-1 equity plans were launched in 2009 so the 15-year data is not available yet. But NPS have two limitations - your money virtually gets locked in till you reach the age of 60. And even after that, you have to necessarily buy an annuity plan with at least 40 per cent of the accumulation. Also, NPS does not allow you to invest more than 75 per cent of the money in equities. The ELSS, on the other hand, doesn't have such strings attached. Moreover, you get a more broad-based market exposure as they don
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