Check, do your stock returns pass the PPF test?

Many investors who came to the stock party over the last one year will find it difficult to earn high returns that fund managers base their investing pitches on. Photo: Mint
Many investors who came to the stock party over the last one year will find it difficult to earn high returns that fund managers base their investing pitches on. Photo: Mint


  • If you are earning an almost-guaranteed return of 8.1% on PPF, why would you want to take the risk of investing in stocks to earn 8.3% or 8.4% per year?

MUMBAI : Recently, the chief executive officer (CEO)of a well-respected mutual fund put out a very interesting tweet to show how data can be cherry-picked to come up with a result which makes the case for investing in stocks or the case for not investing in stocks, depending on what one wants.

So here’s the example. Let’s say an investor invested in stocks on 8 January 2008. This was the day on which stock prices reached their then peak. Let’s say that the investor had bought the stocks that comprised the Nifty 50 index on that particular day.

Peak temptation
View Full Image
Peak temptation

You might also like

Can we trust Global Hunger Index ranking? 

HUL goes shopping to widen product portfolio

Tech firms say no to exorbitant counter offers, salaries plunge

Infosys has beaten TCS 5 times in 9 quarters in revenue growth

Also, over the years, the investor continued to hold on to the stocks that comprised the Nifty 50 index at any point of time. This means that if a stock was dropped from the index and a new stock added, the investor also did just that. For the sake of calculation, we also assume that the act of selling a stock and buying a new one was costless (which isn’t the case in real life). At the same time, any dividends received were reinvested in buying Nifty stocks.

Considering these assumptions, the return on the investor’s portfolio between 8 January 2008 and 30 September 2022 would have stood at 8.3% per year. This is the per year return on the Nifty 50 Total Returns Index between then and 30 September. A total returns index takes into account the dividends given by companies as well.

The MF CEO’s tweet had said that the return on the Nifty Total Returns Index was 8.4% per year. The difference isn’t material enough and hence, can be ignored.

Now let’s compare this to the return earned if the investor had invested in the public provident fund (PPF). The MF CEO’s tweet suggests that the returns on investing in PPF would have also amounted to 8.4% per year. The calculation carried out by this writer suggests that the return would have been around 8.1% per year.

Irrespective of whether the return would have been 8.1% or 8.4% on PPF, the point is that if you are earning an almost-guaranteed return of 8.1% on PPF, why would you want to take the risk of investing in stocks to earn 8.3% or 8.4% per year?

Of course, as the MF CEO put it in his tweet, we are cherry-picking data here to assume that the investor bought stocks on 8 January 2008, when the stock market peaked in that particular cycle. After that day, the stock prices fell and the Nifty 50 Total Returns Index was down by 60% by late October of the same year.

Given the fact, the prices fell by 60% within months of the stock market hitting its then peak, it seems it’s only fair to say that we have cherry-picked data here to come to the conclusion we wanted to. It’s been well-documented that over a period of time, the returns from investing in stocks are likely to be better than investing in any other asset class.

Nonetheless, this is looking at things from just one angle. While investing in stocks may lead to better returns over a period of time, the question is, are investors benefitting from the same? Are investors earning these high returns as well?

When you invest at the peak

Let’s specifically consider the month of January 2008. The net inflow into equity mutual funds in that month was 12,717 crore. The Centre for Monitoring Indian Economy provides data for net inflows into equity mutual funds from October 1999 onward and this was by far the highest inflow ever up until then. The inflow in just one month was around 7.4% of the total assets under management under equity mutual funds as of January 2008.

There was a further net inflow of 6,756 crore into equity mutual funds in February 2008. In fact, the net inflows of 12,717 crore in January 2008, were crossed only almost a decade later in August 2017.

So, the point here is that while looking at stock market returns from a peak might be cherry-picking data, nonetheless, the fact of the matter is that a substantial chunk of retail investors invest in stocks, directly or indirectly, only after stocks have done well for a period of time and are quoting at around their peak level.

In fact, the mutual funds understood this very well at that point of time and launched six new equity schemes during January 2008. These schemes saw a total of 8,994 crore being invested into them. In fact, this was the second highest inflow ever into equity mutual funds through the launch of new schemes, during the period October 1999 to March 2019.

Of course, other than mutual fund investors, there would be investors who bought stocks directly as well in January 2008. The chances are that on an average the returns of these investors, who had bought stocks directly and indirectly, assuming they had held on to their investment up until now, would be pretty average.

Now let’s consider more data points.

The Nifty 50 Total Returns Index starts from June 1999. So, for the period before that we will have to consider the BSE Sensex, which has data starting from April 1979. On 12 September 1994, the Sensex reached its then peak of 4,631 points. The annual return between then and 30 September 2022 works out to 9.4%. Of course, this does take the dividends given by the stocks that constitute the Sensex into account. We can assume that the returns on account of reinvestment of dividends amount to another 1% per year.

In comparison, an investment in the PPF between then and now works out to a return of 9% per year, which is slightly lower than investing in stocks. Nonetheless, a few points need to be considered. An investment in PPF saves tax. The same is not true about stocks unless one is specifically buying tax-saving mutual funds.

Over the last few years, the long-term capital gains on stocks have become taxable. Further, investing in stocks comes with a significantly higher risk given that PPF is backed by the government. Once we consider these points, we can conclude that the return on PPF between September 1994 and now has more or less matched investing in a broad basket of Sensex stocks.

Of course, on the flip side, there has always been a limit on the amount of money that can be invested in the Public Provident Fund during a given year. That limit currently stands at 1.5 lakh.

Back in 1994, the equity mutual funds were a very small business. In fact, the first private sector mutual fund, Kothari Pioneer Mutual Fund, which was later merged with Franklin Templeton Mutual Fund, was registered only in July 1993. The public sector mutual funds were around before that. The Unit Trust of India was set up in 1963 and other public sector mutual funds entered the business in 1987.

When the stock market hit its then peak in 1994, a huge number of initial public offerings (IPOs) hit the market. Thousands of crores were raised from retail investors. Many of these companies raised the money and then disappeared. In popular parlance, this is referred to as the vanishing companies scam. This again shows that many retail investors get into the stock market only around the time it’s peaking.

Now let’s consider 12 April 1992, when the BSE Sensex reached its then peak of 4,467 points. This was around the time when Harshad Mehta was playing pied piper and drawing retail investors into stocks by the droves. The stock market returns between then and now amount to 8.8% per year. Given that the Sensex does not account for dividends paid by companies, we can safely say that the overall return would work out to around 10% per year. In comparison, the return on PPF between then and now also works out to 10% per year. Clearly, if you are the kind who tends to invest in stocks only around the time they peak, you are much better off investing in the PPF.

Then and now

What does this mean in the current scheme of things? What happened in the past has also happened over the last two years. Take a look at Chart 1 and Chart 2. Chart 1 plots the net inflow into equity mutual funds in a given month versus the high the Sensex reached during that particular month, from April 2019 onwards.

It makes for a very interesting read. The Sensex crashed in late March. Investors withdrew money from equity mutual funds between July 2020 and February 2021. It was only when the BSE Sensex crossed 50,000 points, and had been there for a while, that money really started coming back into equity mutual funds.

It was like the retail investors were waiting for the stock market to touch its peak levels and then get back into stocks with a bang. In fact, the total inflows over the last one year amounted to 1.84 trillion. This solid inflow started after the BSE Sensex touched its all-time high of 62,245 points in October 2021. Indeed, the last one year has been a period when stocks have constantly been priced at their highest levels.

Now take a look at Chart 2. It plots the number of demat accounts in existence at the end of a particular month and the highest level reached by the Sensex during that month. As the Sensex has gone higher in the last two years, the number of demat accounts opened has also gone up at a fast pace. In September 2020, the number of demat accounts stood at 46.6 million. By September 2022, they had more than doubled to 102.6 million.

Not cherry-picking

The moot point is that many investors rush to buy stocks, directly or indirectly, only after their price has run up quite a bit, which is why stocks may generate good returns over a period of time, but it isn’t necessary that many investors are earning those returns. Hence, comparing the return on stocks from their high points with returns generated by the PPF isn’t really cherry-picking. It should be par for the course.

Of course, many investors who came to the stock market party over the last one year will find it difficult to earn high returns of the kind that fund managers base their investing pitches on.

While predicting the future is a mug’s game, those who have invested good money over the last one year should consider themselves lucky if the rate of return over a period of time beats the returns generated by investing in the PPF.

There are a couple of corollaries. The data shared here doesn’t imply that the PPF returns beat the returns generated by the stock market, in all situations. These are very specific but important situations nonetheless. In fact, a simple systematic investment plan (SIP) into an equity mutual fund over a long period of time is likely to generate better returns than all other asset classes. But then this is a very boring way to invest and most investors seek excitement from their investing.

Further, what is true about stocks is also true about other asset classes. People rush to invest in them only after they have rallied quite a bit. Cryptos are a good recent example, where many investors burnt their hands after the price of bitcoin, the most popular crypto, crossed $50,000.

Before crypto, real estate was an excellent example. Many investors jumped into buying real estate post 2008 and 2009, after prices had already rallied quite a bit. More than a few builders took advantage of this zeal. They either took the money and disappeared or diverted it towards other avenues. Some of these investors are still waiting for their homes to be delivered.

Vivek Kaul is a writer and an economic commentator.

Elsewhere in Mint

In Opinion, Manu Joseph reveals life hacks one can learn from Ambedkar. Sandipan Deb says the West has overplayed its hand in cornering Russia. Anjani Trivedi argues the American EV strategy is caught up in a geopolitical haze. 

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.



Switch to the Mint app for fast and personalized news - Get App