Wednesday, August 27, 2014

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 …’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:
Sensex closing value
One year change
August 1993
August 1994

Sensex closing value
One year change
August 2013
August 2014
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 
Our data is marginally different since we have taken August data till 25th 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
Rs. 73,124
10.45% p.a.
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 ... 


  1. Very good analysis and very valid points Amit!

  2. Thanks sir.
    I feel even MF should use total return index as benchmark for large & diversified funds

  3. Moreover, the figures shown in the calculation were absolutely wrong. I have that calculation. Moreover, PPF was yielding 12% at the starting period of the sample which I thing is never going to be the case now. And of course I agree to other points that you have made sir.

  4. Hi

    As ET uses the convenience of not taking dividends you have taken the liberty of not taking brokerage costs given that composition of Sensex is dynamic and changes very quickly. Example RCOM was 3-4% in 2007 and is no more part of it. ITC from 2 to 10% and now 8

    The brokerage cost back then was 2.5% and the traded rates would be high of the day ;) ( ask an old timer how much slippage)

    What i would suggest is find the best returns :) on a CAGR basis taking your cherry picking between 1992-2014. It comes to less than 11-14% only

    You will notice that stocks out of the Sensex actually give you the equity returns !



    1. Hi Nooresh,

      I think I need to clarify what I have done. There is no cherry-picking and there is no attempt to prove that Sensex would always be a better choice even compared to PPF or any of the active portfolios. The idea was only to highlight the mistakes the writer of the article had made in his analysis. I am reproducing one line of my blogpost for your ready reference: "Equity is a risky asset class and hence one should not expect 100% guarantee of positive returns, whatever the period"

      While stocks have come in and gone out of Sensex, your example of ITC's weightage going up or down is simply a function of changes in M-Cap of ITC with respect to the other shares in the Sensex. You need not worry about buying or selling a stock on account of this change in weight.

      I take your point that the brokerage costs must be added.