Should I invest in PPF or index funds for a 15-yr horizon?


I am unsure whether I should invest in PPF (Public Provident Fund) or Index funds for a period of 15 years. I am aware of the EEE (exempt, exempt, exempt) benefits on PPF, but I would like to know the actual returns of both these investments over a 15 years’ horizon post-tax, if any.

—Name withheld on request

In the past 15 years, PPF interest rates have ranged between 8.8% on the high side and 7.1% on the low side. Although this rate has gone as high as 12% in the past, it is very unlikely to happen again in the near future. The interest rate is set by the government every quarter. The PPF interest rate for the October-December quarter, FY 2022-23 has been fixed at 7.10%. A rate of 8% on average would be a reasonable, if not safe, assumption for the next 10+ years, although there is a distinct chance of it trending lower.

Index funds (based on the Nifty 50 index), on the other hand, have returned 9.13% in the last 15 years, but upwards of 13% in the last 3, 5, and 10-year time periods. Going forward, one could assume a return of 10-12% from this category in the next 10+ years. From a taxation perspective, returns from index investing would be subject to a 10% taxation after the first 1 lakh in profit. The long-term capital gains tax rate of 10% applies on mutual fund units sold after one year of holding.

So, post-tax returns from index investing would be around 9 to 11% (CAGR).

So, your choices are an investment that would yield about 8% or lower and an investment that could yield 10% or higher. Although the latter is more a probabilistic number than the former, given the time horizon that you are investing for, the likelihood of higher returns from index investing is on the higher side.

An additional return of 1 to 3% compounded over the long term could add up to significant difference in corpus. So, given your long-term horizon, it would be prudent to go with index fund investing rather than a fixed-return investment such as the PPF. You can invest in an index fund such as UTI Nifty Index Fund for the same.

Srikanth Meenakshi is co-founder at PrimeInvestor.

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