Should I spend money on PPF or index funds for a 15-yr horizon?
I’m not sure whether or not I ought to spend money on PPF (Public Provident Fund) or Index funds for a interval of 15 years. I’m conscious of the EEE (exempt, exempt, exempt) advantages on PPF, however I want to know the precise returns of each these investments over a 15 years’ horizon post-tax, if any.
—Name withheld on request
In the previous 15 years, PPF rates of interest have ranged between 8.8% on the excessive facet and seven.1% on the low facet. Although this price has gone as excessive as 12% prior to now, it is extremely unlikely to occur once more within the close to future. The rate of interest is about by the federal government each quarter. The PPF rate of interest for the October-December quarter, FY 2022-23 has been mounted at 7.10%. A price of 8% on common can be an affordable, if not secure, assumption for the following 10+ years, though there’s a distinct probability of it trending decrease.
Index funds (primarily based on the Nifty 50 index), alternatively, have returned 9.13% within the final 15 years, however upwards of 13% within the final 3, 5, and 10-year time durations. Going ahead, one might assume a return of 10-12% from this class within the subsequent 10+ years. From a taxation perspective, returns from index investing can be topic to a ten% taxation after the primary ₹1 lakh in revenue. The long-term capital positive factors tax price of 10% applies on mutual fund models offered after one yr of holding.
So, post-tax returns from index investing can be round 9 to 11% (CAGR).
So, your decisions are an funding that may yield about 8% or decrease and an funding that would yield 10% or larger. Although the latter is extra a probabilistic quantity than the previous, given the time horizon that you’re investing for, the probability of upper returns from index investing is on the upper facet.
An further return of 1 to three% compounded over the long run might add as much as vital distinction in corpus. So, given your long-term horizon, it might be prudent to go along with index fund investing quite than a fixed-return funding such because the PPF. You can spend money on an index fund equivalent to UTI Nifty Index Fund for a similar.
Srikanth Meenakshi is co-founder at PrimeInvestor.
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