PPF vs equity: The maths is easy but could be more intuitive, and the choice is hard
30-May-2023 •Dhirendra Kumar
Which is better, PPF or stocks? In more ways than one, that's a pointless comparison because the two asset classes play substantially different roles in savers' portfolios. However, making such a comparison is quite useful simply because PPF is the canonical long-term fixed-income investment in India. Almost everyone who saves has some PPF, and it stays invested at least for years, often a decade or even two.
A few days ago, I asked one of the researchers on our team to make a long-term comparison of the returns from PPF and Sensex for as long as a concurrent history existed. This hypothetical exercise consisted of investing Rs 10,000 a year starting from 1979 when Sensex history started. In our hypothetical series, Rs 10,000 was invested every year from 1979 to 2023. Of course, the BSE Sensex was created in 1986, but the base year was 1979; thus, the values were back-calculated.
The headline result is that the annualised return from PPF was 9.9 per cent and that from a Sensex-equivalent investment was 14.3 per cent. How does that sound to you? Is a four-odd per cent extra return a year worth the volatility of stocks? Is it worth dropping the Government of India's sovereign guarantee on PPF? To most people who are used to thinking about investments over a year or two or three, a 4 per cent-a-year lead is very good but not quite an earth-shaking phenomenon.
If you're one of these people, let me change your mind for you. Over these 44 years, the Rs 10,000 a year deposited into PPF grew to Rs 59.7 lakh while the Rs 10,000 invested in the Sensex grew to Rs 2.3 crore. That's almost four times the money, 3.9, to be precise. Do you think having Rs 2.3 crore instead of Rs 59.7 lakh is a difference that can be taken casually? Now, I'll grant you that 44 years is an unrealistic time frame, and no one invests for that long a period. However, the goal of this exercise is not to calculate precise returns but to demonstrate that with compounding over long periods, even moderate-sounding differentials in returns can make a huge difference. The difference is large enough to make someone wealthy instead of merely comfortably off.
Moreover, it's not as if this investment comparison did not generate large differentials earlier also. If we compare the 30-year mark in 2009, the Sensex investment was 3.3 times the PPF investment. At that point, the PPF investment was at Rs 19.9 lakh, while the Sensex one was at Rs 65.2 lakh. There are no smooth lines in this comparison. Given the inherent volatility of the Sensex, after the first decade, this differential has varied between three times and 4.5 times. That's just the way equity-based investments are.
The important thing to note is that fixed-income investments cannot really beat inflation and generate wealth long-term. Note that we are talking about PPF here - which is the creme de la creme of fixed-income investments. PPF's interest rate is always much higher than ordinary types like bank fixed deposits; on top of that, it's fully tax-sheltered. When it comes to bank FDs etc., you cannot even keep up with inflation, let alone get real returns, especially when the constant annual bleeding from tax is taken into account.
Equity investing, especially through mutual funds SIPs, is rising rapidly in India. However, the fact remains that overall, in terms of savings, India is still very much a fixed-income country. Tens of crores of people have all their financial savings in bank FDs, PPF, post-office deposits, and such and hardly ever think of any alternative. The basic idea that equity's volatility is a short-term problem while fixed-income's low returns are a life-long problem hasn't really sunk in deeply. Stable, guaranteed, low returns, or volatile high returns. You can pick just one.
Suggested read: Debt is riskier than equity