PPF investment can beat Sensex returns over 20-year period - it can, but it did not this time ...

There are so many instances when you come across a newspaper article and the heading itself tells you that there is something wrong with the story. Recently, one such story talked about equity underperforming PPF over a 20-year period. As a proxy of equity, the writer had taken Sensex data. This story was published in a leading business daily and has been widely circulated in social media.

First of all, the timing of the story is interesting. The author highlights this in the opening paragraph. The line catches attention. It stresses upon the fact that in spite of the last 40% upside, equity underperforms PPF. Well, those who understand compounding know that 40% for a year is lower than 8% per year for 10 years and far lower than 9% per year for 20 years.

Secondly, the writer has picked up one period (just one period) to prove a point. Anyone with an understanding of statistics knows that this is too small a sample to be called representative of anything. (For more detail, please see this story … http://www.cafemutual.com/News/Don’t-be-fooled-by-averages~124~Cli~FinancialPlanning~61)

One must question why only this period is picked up for the analysis. Is this some kind of a Bollywood movie script that one is talking about “Bees saal pehle ki baat hai…”? Exactly 20 years ago, the Sensex was at a high point. While the writer mentions the 40% upside in the last one-year of the analysis, he forgot to mention a similar rally between August 1993 and August 1994. Well, that rally was not similar to the current one. Here are the numbers:

Month	Sensex closing value	One year change
August 1993	2,633.79	74.20%
August 1994	4,588.16

Month	Sensex closing value	One year change
August 2013	18,619.72	42.02%
August 2014	26,442.81

While the Sensex has gone up by 42% in the last year, it had gone up by 74% for the year at the start of this analysis. This means, it is not just the current point that is high as mentioned by the writer, even the starting point of his analysis was also a high point.

Third, PPF cannot have a one-time investment. It requires annual investment. This will completely change the result if you allow annual investments both in PPF as well as equity. Those familiar with the concept of SIP in equity would understand this point.

Fourth, and very important – the writer does not seem to know much about the index used. Sensex, the index he has used to represent equity is a principal return index and not a total return index.

A principal return index reflects the movement of the stock prices and ignores any dividends paid out along the way. A total return index adds back the dividends also.

Why are we suggesting that this is a critical point? The writer has considered reinvestment of all the interest in case of PPF and hence got the benefit of compounding. To do a fair comparison, even the equity dividend should also be considered reinvested.

We constructed a hypothetical index assuming various dividend yields and added back all the dividends. We used Sensex data as the base for the calculations and assumed three different dividend yields (annualized), viz. 1.0%, 1.5% and 2.0%. We had to do this since Sensex Total Return Index is not publicly available on www.bseindia.com. 

Our data is marginally different since we have taken August data till 25^th August, whereas the writer of the article might have taken slightly old data. However, this difference is so small that it may be ignored. (According to the article referred, Sensex was up 5.75 times over 20 years, whereas in our analysis, Sensex is up 5.76 times). Investment in PPF, on the other hand, would have multiplied by 7.31 times – quite a difference this is.

According to the said article, investment of Rs. 10,000 in PPF would be worth Rs. 73,124. In comparison, investment in Sensex for the same amount would be worth Rs. 57,520.

As mentioned earlier, this number is calculated without adding back the dividends. What happens if we add back the dividends?

Here is the data (as calculated by us):

Amount invested: Rs. 10,000 (one time investment)

Investment period: 20 years

Value after 20 years:

Investment vehicle		Value after 20 years	CAGR
PPF		Rs. 73,124	10.45% p.a.
Sensex	Without dividends	Rs. 57,633	9.15% p.a.
	Dividend yield of 1% p.a.	Rs. 70,387	10.24% p.a.
	Dividend yield of 1.5% p.a.	Rs. 77,841	10.79% p.a.
	Dividend yield of 2% p.a.	Rs. 85,949	11.35% p.a.

Over the years, the average dividend yield on Sensex stocks has been in the range of 1.5% p.a. to 2% p.a. In both these situations, the final value of equity investment is higher than PPF.

Having said that, our attempt is not to prove that equity would always outperform PPF for periods as long as 20 years, since we have also presented only one data point. The idea is not to prove equity as superior to anything else, but to highlight the fact that if some part of the data is ignored, a totally different picture may emerge. Equity is a risky asset class and hence one should not expect 100% guarantee of positive returns, whatever the period.

Let us revisit the title, "PPF investment can beat Sensex returns over 20-year period" - can it happen? Yes, as mentioned in the previous paragraph, equity is a risky investment avenue. The risk may result into underperformance or negative returns. However, in this analysis, it did not happen.

PPF investment can beat Sensex returns over 20-year period - it can, but not this time ...