Public Provident Fund vs Equity: How to invest for better long-term returns?

financialexpress.com:

A potential investor told me that he had a dream scenario: a Public Provident Fund (PPF) that would take any amount of money and give back tax-free returns. He said he would put all his savings in PPF if that were possible.

I tried to persuade the client to invest in the equity asset class for a long-term horizon, but he only had eyes for PPF. It’s not fair to compare them because they are different asset classes with different roles in a portfolio. The only thing they have in common is that they are both long-term investment tools. But what about their long-term returns?

PPF gives an 8% post-tax return, while the equity asset class can give around a 12% post-tax return in general. This leads us to the questions:

New investors may not find equity a convincing alternative to PPF, even with a 4% higher return, given the uncertainty and risk involved.

Also Read: Should you invest in multi-cap or flexi-cap mutual funds?

Let’s make a stronger case for equity. A 4% extra return may not seem like much, but when you compound it over 10, 20, 30, 40, or 50 years, it makes a huge difference. Here is the calculation:

The chart illustrates how the gap widens as the years go by. In 10 years, the difference is only Rs 9 lakh, but in 50 years, it is Rs 24 crore. This difference can make or break one’s wealth and lifestyle. This is why people with similar incomes end up living very differently. One travels within the country, while the other goes abroad. One drives an ordinary car, while the other drives a luxury car, and so on.

You must also consider that inflation erodes the value of money over time, and PPF barely manages to outperform inflation. So PPF investors are only maintaining their purchasing power without creating wealth.