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Should I invest in PPFs or index funds over the next 15 years?

Public Provident Fund (PPF) is a popular long-term savings scheme in India and is looked upon majorly by low-risk investors owing to its benefits of tax savings, safety of capital, and satisfactory returns. This scheme was introduced by the Finance Ministry National Savings Institute in the year 1968. The major objective of this scheme is to assist you to save over the long term and earn returns on the same. PPF offers an attractive interest rate with the provision of no requirement to pay tax on the returns earned as interest. While PPF is a fixed-income security providing assured returns and capital preservation, an index mutual fund is a market-linked instrument highly popular among mid- to high-risk appetite investors. 

As suggested by the name, an index fund invests in stocks that imitate stock market indices such as BSE Sensex, NSE Nifty, etc. They are passively managed funds, which means that the fund manager invests in the same securities as present in the underlying index in the same proportion and does not change the investment portfolio composition. Such funds aim to provide returns the same as the index that they track. 

Should you opt for index funds or PPFs to invest for a span of 15 years?

In the last 15 years, PPF rates have ranged anywhere from 8.80% to 7.10%. While the rate of this investment instrument has even gone as high as 12% previously, it is unlikely to happen once again in the future. The rate of interest is set by the Indian government every quarter. At present, the rate of interest for the quarter October – December, FY 2022-23 is fixed at 7.10%. An interest rate of 8% on average for this instrument would be reasonable as an assumption for the next 15+ years. However, there are relatively high chances that PPF’s rate may decrease. 

Index funds, on the contrary, have provided returns of around 9.13% in the past 15 years. Going ahead, you may consider a return of anywhere between 10%-12% from this instrument in the next 15+ years. From a taxation viewpoint, LTCG (long-term capital gain) tax rate is applicable at 10% on units of mutual funds sold after a year of holding. So, after-tax returns on index fund investing may be nearly 9%-11% (CAGR). 

Hence, if you are investing to keep your surplus funds for a long-term period of over 15 years, then index mutual funds are a better choice as they have the likelihood of generating higher returns over the long term than PPF. So, considering that you are investing for a long-term horizon, opting for the index fund is a more prudent move than investing in any fixed-return instrument like PPF. This is because index mutual funds do have the potential to generate higher returns than fixed-income assets and inflation by a wide margin over the long term. 

However, it’s also important to note that both PPF and index funds serve a different role in your investment portfolio. PPF is a great tool for tax saving as well as retirement planning. While index funds are a good option for wealth generation and capital appreciation in the long term to meet several financial goals. You can invest in both instruments depending on your risk profile, current investments, and financial goals.