SIP Vs PPF

POSTED BY Sowmi ON February 7, 2012 2:00 pm COMMENTS (41)

Dear All,

I would like discuss this article with the below questions. I strongly believe no product can match the PPF and gives the benefit of Power of Compounding. I think savings through PPF for more than 25 to 30 years for our retirement needs is the best way to do that. what do you think ? I am surprised why no one notices this and promotes this concept. πŸ™

Q1) I am wondering where is the concept of compounding comes in SIP and it works just based on the Rupee Cost Average rule only. I think Reinvesting the profit / interest is NOT considered as Compounding. SIP yields good returns because of the volatility nature of equity markets. This gives best returns only if there is extreme volatility and if the market goes with minimal volatility you end up in less profit. Also even in SIP we need to make a close monitoring and come out of it once we reaches our targeted returns. Otherwise there is chance that our profits will get eroded in a quick time and you need to wait minimum 3 to 4 years for the Rupee Cost Averaging happens again. I personally experienced this. No mutual fund company declares interest compounding interest annually like PPF.

Q2) On the other side if you take PPF this removes all of the above issues like close monitoring etc and I believe only PPF alone gives the real benefit of compounding besides tax benefits. No other instruments exists to match this. Do you think any other financial instruments / methods exists to give the same return as if i invest Rs 1000 every month for 25 to 35 years in PPF continuously.

Q3) Also is there is any mutual fund exists for more than 25 years like PPF? The reason behind this question is i have seen many good funds like Magnum contra , reliance vision , growth are all considered to be the best mutual funds across the globe but if you see their current ratings it all dropped to three str ratings. I am not sure whether the fund houses will keep them or close them in next few years. So even it i performs the power of compounding may get abruptly get closed by the fund houses. But in PPF the probability of happening this would be very less and this scheme exits already for more than several decades.

I sincerely request you to validate my thoughts and provide clear directions on this topic with your detailed analysis separately for each question.

Cheers
Sowmi
sowmi.narayanan@planetsoft.com

41 replies on this article “SIP Vs PPF”

  1. Dear Vihan, please open in current FY itself. It’s beneficial to open at the end of FY as you ‘ll complete your 15FY term exactly in 15Y & you w’d need not to wait for full Fy completion as if you open account in April 2013 for eligible FY 2013-2014.

    You can not open for your father. He should open his account himself.

    Thanks

    Ashal

  2. vihaan k says:

    Dear Ashal,

    I plan to open ppf account this month inmy name,

    kindly advise whether I should wait till next month for year opening fy 13-14.

    Can I open another ppf account in name of my father

    Which is the best mutual funds to invest for long terms

    Vihaan

  3. Tushar R Gawande says:

    Hi
    Can anybody please help me in getting correct PPF calculator for 25 Years?
    I can various calculators from Google but all are limited to 15 years horizon.
    Thanks in advance.
    Tushar

    1. Dear Tushar, first of sorry for not replying in time. I missed your post. Regarding all the calculators available only for 15Y, my dear friend, that’s for the reason that initial period is limited to just 15Y. Beyond that there is an extension of 5Y block, which may be used by some one & may not by others. There is more to it, please do not rely on any calculator for the fact that ROI in your PPF is not guaranteed for next 25Y. It ‘ll change every year & accordingly the final corpus ‘ll change.

      Thanks

      Ashal

  4. Dear Sowmi, voted or non voted for the best answer, the final point is – knowledge should reach to every one & the points discussed should be understand by the readers.

    That’s it.

    I’m not interested for a moment that you or some one else is voting my answers or not. At the end of the day, the message what I’m trying to convey from my posts should reach you. Then only my purpose of answering ‘ll be over.

    Thanks

    Ashal

  5. Sowmi says:

    All,

    One general question. Will it not be possible to choose more then one answer as best ones. It seems i selected the last vishal as best answer and the earlier one i selected was gone. I think as we move forward within a same topic we should be allowed to select more than one as best answers.

    Any way i would like to share my immense gratitude to all of them who responded to all my questions patiently. Of Course my special kudos and hugs to the moderator and all other team members too. I am confident that this thread will be more useful to many and will be part of most no of views list in near feature.

    Thanks
    Sowmi

  6. Dear Sowmi, yourt understanding is correct. But there is no need to invest in 7-8 funds.

    Invest in

    1 large cap fund
    1 multicap fund
    1 midcap fund

    That’s it.

    Thanks

    Ashal

  7. Sowmi says:

    Dear Vishal / Justgrowyourmoney,

    Thanks for the detailed responses and let me summarize my understanding.

    1) Irrespective of whether a mutual fund is large , mid or small cap the underlying stocks companies need to be good which determines the actual performance of the fund. This is the prerequisite to choose mutual fund. For this we can refer some good ratings methodology like ‘valuereasearchrating’ etc.

    2) Next as above irrespective of whether a mutual fund is large , mid or small cap , volatility is applicable to all of them and it is very normal process in equity.

    3) To handle the above point 2 , Rupee Cost Averaging mathematical method / approach comes handy and take care of the volatility in the long run.

    I am sure you agree with my understanding up to this. If you agree and go with the above points you may end up more than 6 to 8 funds min which falls in to different types and sectors etc. Now I would like to close this thread with couple of questions related with this scenario like ‘How to choose a MF for SIP from the above list?’ , Usually what is the best no of MFs one can have in his portfolio ? Is it safe / recommended to have one best preforming large cap and mid cap base MFs ?. In short what is the basis you choose a MF for SIP ?

    Cheers
    Sowmi

  8. Sowmi – No scheme performance is a straight line heading to the top. Any scheme (Large/Mid/Small cap) will exhibit ups and downs all through their life – Large caps have a smaller blip while small caps are more volatile and move aggressively in both directions.

    So thinking that a lump sum investment in large cap is desirable is fallacious. Similarly it is not necessary that only a SIP will outperform for Small/Mid Caps. The theory of SIP is that instead of a lump sum if you keep contributing day-in and day-out, month-in and month-out it is highly likely you will enter both when the markets are high and when they are low thus lowering the average cost of your investment so when the markets break the barriers and move ahead your holdingss surge.

  9. Sowmi says:

    Dear Ashal,

    Actually i held up in other activities and hence delay in replying. Thanks a lot for your responses and it is more informative and useful. Few more follow up questions (FQ denotes Follow up Question πŸ™‚ .

    SIP Related
    —————
    FQ1) Yeah I understood the underlying stocks of each MF is different and hence the performance also will be different. Logical and Agreed. This aspect makes sense if we want to invest in lump sum. But i believe working of SIP is entirely different or opposite. Let us take the below scenarios and compare SIP and lump sum investments.

    Assume one person is investing in these funds both in SIP and also in lump sum initially.

    Case 1 : Duration 5 Yrs. Starting Price (NAV) = Rs 10 and after 5 Yrs the price is Rs 50. This is starting at Rs 10 and growing at a steady growth of Rs 15 , Rs 20 , Rs 30 , Rs 40 and Rs 50 every year. i.e. no major volatility and mostly the NAV is in incremental mode.

    FQ 1.1.) I believe we can expect these types of performances from Large Cap MFs. Isn’t ?

    FQ 1.2.) In this case the lump sum return will be higher than SIP. Isn’t ?

    Case 2 : : Duration 5 Yrs. Starting Price (NAV) = Rs 10 and after 5 Yrs the price is Rs 20. This is starting at Rs 10 but growing with heavy volatility. i.e. for the first few years the price is below the starting price of Rs 10 and suddenly it started performing well and again it went down and at last it reaches the price of Rs 20.

    FQ 1.3.) I believe we can expect these types of performances from Mid or Small Cap MFs. Isn’t ?

    FQ 1.4.) In this case the SIP will be return will be higher than lump sum. Isn’t ?

    Please note i am NOT comparing above two funds and i know the difference between the two is because of the underlying shares. But i am comparing SIP Vs Lump sum concept and also where SIP works (would like to know) better within a SINGLE fund.

    FQ2) No where i am able to find a SIP calculator even to compare funds within a single AMC too. Please share if you found any.

    Reg PPF
    ———–

    Note :

    a) I tried my level best to locate the Manish article you have mentioned as ‘how to invest online into PPF’ but couldn’t able to. So please share the link.

    b) I read Manish article published today about regarding calculation of PPF and it is crystal clear.

    1. Dear Sowmi, Once again I’m trying to answer your queries. MT stands for My Take.

      FQ 1.1.) I believe we can expect these types of performances from Large Cap MFs. Isn’t ?

      MT – No, please don’t expect any linear progress from any MF, be it Large or mid or small or multi cap. As the underlying asset – stocks do not have a linear progress in price how can the NAV may become a linear progress one? The inherent volatility is bound to happen. Yes over the really long term say 10-15-20 years, the over all direction ‘ll be upward.

      FQ 1.2.) In this case the lump sum return will be higher than SIP. Isn’t ?

      MT – How many of us, do have a large enough amount to invest as lump sum? This is one part of the answer. Another part is – As the volatility is bound to happen in MFs, you are never sure of the lowest point entry, that’s where SIP provides an average entry price. Yes for a continuous long bull run like from 2003 to 2008, SIP ‘ll underperform against a lump sum investment. But do remember we investing through SIP to counter volatility & even during these long bull run there were patches of downturn.

      FQ 1.3.) I believe we can expect these types of performances from Mid or Small Cap MFs. Isn’t ?

      MT – There is no such assumptions which ‘ll work. Please read the FQ1.1 reply & same applies here also.

      FQ 1.4.) In this case the SIP will be return will be higher than lump sum. Isn’t ?

      MT – Already answered in above questions.

      FQ2) No where i am able to find a SIP calculator even to compare funds within a single AMC too. Please share if you found any.

      MT – You have to do it manually for any SIP calculator available on any site. For example – please check the SIP return of HDFC Eq. & then DSP BR Eq. from 1st March 2002 to till date mly SIP of X amount in SIP calculator of http://www.valueresearchonline.com

      Let me fetch you that PPF online investment link from http://www.jagoinvestor.com

      Thanks

      Ashal

  10. Dear Sowmi, till this point I have answered your query for Eq. MFs & SIPs. I’m taking break to know your inputs, views on the same.

    I’ll try to answer your PPF related queries also but only after knowing the views on the above.

    Thanks

    Ashal

  11. Sowmi says:

    Few more questions on PPF.

    Q1) It seems we can able to invest for any no of years in PFF by just extending it for every 5 years ? Is there is any restriction on this ?

    Q2) While opening the PPF account is there is any restriction exists for the initial amount ? Can I open with 3 lac amount and then invest Rs 1 lac annually ?

    Q3) How the PPF interest calculation works ? I think for every month they calculate simple interest and year end they will calculate compounding ?

    Q4) Can you please provide one small example may be for one year period to explain how monthly interest is calculated and also at the year end how it get compounded ?

    Q5) Hope we can able to go for ECS for PPF contribution. If this facility is not available / supported how to avail this ? This is very critical aspect to make PPF reachable to the mass ? Isn’t ? How to do this ?

    Kindly respond to my questions separately for better understanding.

    Cheers
    Sowmi

    1. Dear Sowmi, I hope, Eq. part queries are over now. Hence I’m trying to answer your PPF queries.

      1. No, there is no such restriction for PPF renewal for a block of 5Y every time, till the investor is alive or s/he wants to continue PPF account. Once the investor decide to not to renew, & the last block of 5Y lapses, the PPF account ‘ll be closed & the corpus ‘ll be handed over to the investor.

      2 While opening the account, minimum amount one may invest in is 500 Rs. only & the max. limit is capped at 1L Rs. Hence you can’t commit 3L Rs. at the start. From next year onwards, you have the option to invest anywhere from 500 to 1L Rs.

      3 – For the balance of 31st march, you ‘ll get full FY interest (interest rate ‘ll change now at start of every FY but ‘ll remain constant for that FY). For the amount invested in between from 1st april to 31st march in a FY, the simple interest ‘ll be calculated only on the investment done between 1-5th of every month & at the same time amount realized into PPF within this date band i.e. your cheques are credited to your PPF account on or before 5th of that month.
      In case your cheque is credited after 5th, no interest to you for that month.

      4. Please read the reply above, I hope it;’s clear already. On 31st march every year, the interest against the opening balance of 1st april ‘ll be credited & so do the simple interest for the in between investments. This ‘ll become the opening balance on 1st april for next FY.

      5. Please check a recent article of dear Manish, how to invest online into PPF.

      I have tried to answer you. Please update me for my performance. πŸ™‚

      Thanks

      Ashal

  12. Sowmi says:

    Dear BanyanFA – Thanks for giving a clear answer and proving a another new perspective about working of SIP. i believe you are referring the underlying companies of the MF and NOT referring the actual AMC of the MF in the below statement. Since both of them are givings dividends i just want to be crystal clear. πŸ™‚

    ‘Companies in India generally don’t distribute all of their profits via dividends.’

  13. Sowmi says:

    Hi All,

    I would like discuss few more points about SIP. Here it is.

    Q1) Assume i have five long term goals like my two children education and marriages etc. Now do I need to have each one fund for every goals or do i consider having one single fund for all these goals and withdraw as and when i required ?

    Q2) Does the withdrawal will have any impact on SIP wealth ? Ex : Assume my duration of each goal and the respective monthly SIP amount are viz 6 Yrs – Rs 10000 , 10 Yrs – Rs 8000, 12 Yrs – Rs 7000 and Rs 16 Yrs – 5000. So every month i am investing this thorough Monthly SIP in a single fund as SIP amount of Rs 30000. Now assume i reached the duration of the first goal and withdrawing the required amount. and repeating this for another goals also. Does this have any impact on my wealth generation ? Assume the selected MF is a five star Multi Cap fund and the underlying companies are well diversified.
    If not What is the best way to achieve this and kindly explain with proper data / logic why do you think so ?

    Q3) Please see the link and in this they are suggesting to have different kind of MF like, mid cap etc. As longs as all the SIPs are going to work on a Rupee Cost Averaging rule why this is required ? We can just need to pick any fund and start investing regularly. Isn’t ? Do you think Fund rating is required at all for SIP ?

    http://www.valueresearchonline.com/story/h2_storyView.asp?str=19101

    Q4) Also i believe the exit criteria for any investment is not based on the time duration and it must be based on the achievement of our goal.

    Q5) I searched valuereasearch etc but couldn’t able to locate a SIP calculator which compares SIP returns across AMCs. Please let me know if have any. I desperately looking for that.

    Q6) Most importantly since SIPs are working based on Rupee Cost Averaging and compounding why there is a difference in returns for the same time period. In other words since the pattern of the volatility of the Sensex or market remains same why there is a differnce in SIP results across MFs ?

    Q7) Obviously in my view Rupee Cost Averaging will yield more returns in most volatile situations. Isn’t ?

    Kindly respond to my questions separately for better understanding.

    Thanks
    Sowmi

    1. Dear Sowmi, I’m tryting to answer all your queries one by one.

      1. You may remain invested in 1 or 2 funds for all of your goals. As long as your funds are performing in line. there is no such thing – Chose fund A for Goal X, B for Y & C for Z. Yes for the time of goal you have in hand to achieve, ‘ll decide a different fund. Say one goal is for just 2 or 3Y & another goal is for 15Y. In this situation, 2 different funds are required. 1 for short term goal & 1 for long term goal.

      For all your goals more than 7Y time period, you may opt one or more common Eq. based MFs.

      Thanks

      Ashal

    2. Dear Sowmi, Here is the answer for your query – “Q2) Does the withdrawal ……………………………. with proper data / logic why do you think so ?”

      2. In a sense the withdrawl for your 1st goal @ 6Y term ‘ll not have any impact for other long term goals. Yet the impact may happen if at the time of your redemption, the market is in a downturn & more no. of units are redeemed to raise the money from your investments. How to counter it – There are 2 options & in my opinion both should be exercised.

      A. Shift a part of money at least 1 or 2Y before from Eq. to Debt fund (If the market was running good & you were able to reach your target well before the actual goal time, you may shift the entire goal amount to a debt fund).

      B. As & when your cashflow, permits, keep increasing your mly investments to purchase more & more units.

      Thanks

      Ashal

    3. Dear Sowmi, Ans. No. 3

      Q3) Please see the link and in this they are suggesting to have different kind of MF like, mid cap etc. As longs as all the SIPs are going to work on a Rupee Cost Averaging rule why this is required ? We can just need to pick any fund and start investing regularly. Isn’t ? Do you think Fund rating is required at all for SIP ?
      http://www.valueresearchonline.com/story/h2_storyView.asp?str=19101

      Please do tell me – PPF or Bank FDs or Company deposits are same or some what different although all belongs to a same asst class – Debt. Similarly Eq. MFs are classified on various parameters, One of them is market capital of the stocks – Say large cap, Mid cap, Small cap. another type of classification is on the basis of a particular theme or sector – banking, Infrastructure, Metal, FMCG, Pharma. Now you may understand that risk as well as return from all the MFs ‘ll not be the same even though we are investing under a SIP to use Rs. cost averaging.

      Thanks

      Ashal

    4. Dear Sowmi, ans for your Q no. 4

      Yes, exit decision should be based upon the reaching of goal or for the corrective action if the fund is not performing as per our expectation or performance is below par & not the time frame.

      Thanks

      Ashal

    5. Dear Sowmi Ans no. 5 –

      Do you asking to have a SIP calculator to compare all MFs in a single stroke. In my opinion, you may check the performance of each funds individually. Moreover, you should also check the qtly performance of each fund in past data. this is one thing which ‘ll not change. Say in 3Q of 2011 i.e. from July 2011 to sept 2011 what was the performance of funds, this ‘ll remain constant.

      Thanks

      Ashal

    6. Dear Sowmi, Ans no. 6 –

      As the underlying assets are not common (read same set of shares), that’s why there is a lot difference in performance.

      Thanks

      Ashal

    7. Dear Sowmi, Ans no 7 –

      Please try to understand, Rupee cost averaging is merely a method to invest with a discipline & punctuality no matter what’s the position of market. There is no guarantee of any final destination. Yes the guarantee is if you keep investing in a SIP, you ‘ll be able to get an average out return & it may be better than a one time lump sum investment.

      Also SIP provides the benefits of investing small yet creating big over the period.

      Thanks

      Ashal

  14. Jassi says:

    wow!!!
    Thanks Sowmi for asking this question. I am myself doing the same mistake of investing only in PPF and not considerinf MFs for the very same reasons as mentioned by Sowmi.

    Very informative answers and eye opener for me too πŸ™‚

    Rgds,
    Jassi

  15. BanyanFA says:

    Agreed. Corrected to Earning Retention Ratio.

  16. BanyanFA – Just a small correction. The ploughed back profits make up the Retention Ratio and not the Dividend Payout Ratio.

  17. BanyanFA says:

    Hi Sowmi,
    I hold slightly different views on SIPs via mutual funds. In order to understand the compounding effect via mutual funds, you should look into the underlying asset – which is equity shares held by a mutual funds. Companies in India generally don’t distribute all of their profits via dividends. They plough back 70-90% of their profits and reinvest the funds into the Company. This ratio is generally called as Dividend Payout Ration. If you look closely, this is effect compounding the earnings by investing it again into the Company. So if a company is growing at a healthy rate of 20% year on year, this would mean a compounded annual growth for your funds.

    With regards to PPF, I agree with you – it is one of the best available debt options to take advantage of compounding. You can alternatively explore the option of Provident Fund (http://insight.banyanfa.com/?p=212)

    I know a couple of mutual funds – which have been existing atleast since 1995 – HDFC Equity Fund is one of them. But it is important to understand that India is rapidly growing on its financial infrastructure. Back in 1980s there were not many funds existing. Hence investors didn’t know much about Mutual funds. The real growth in the Mutual Fund Industry has started from year 2000s. And trust me this is the start. Year on year this is just to improve.

    Regards
    BFA

  18. Dear Sowmi, sorry for replying late. Although a lot has already been discussed & specially the compounding part of MFs has already been discussed by dear justgrowmymoney, still I’m trying to put my 2 cents.

    PPF is one of the best thing for long term financial planning & specially the retirement one if we are talking here only Debt. As rightly pointed out to you already, apples should be compared with apples & oranges with oranges i.e. debt with debt & Eq. with Eq. Still PPF has it’s own space.

    Calculations are merely nos. till the time these are not implemented for real life benefits. Till 2 months ago, max. amount in PPF one can invest was 70K. for past 7Y the interest rate was 8% but before that it was 9% & even 12% also. After the recent shake up by the Govt. of india, PPF may not be the same. Please do note, the linking of interest rate to be fixed at the start of every FY with 10Y Govt. Bond yield, in actual is a move which in long term may not be well for investors. The primary reason – as economy ‘ll grow & India as a country ‘ll grow, the over all interest rates in the economy ‘ll come down to more closer levels of rates what are running in other developed countries (3-5% band). Now you may imagine your own calculation of 8% ‘ll become useless for 25 or 30 long year.

    Please reply for the benefit of all of us.

    By the way, the NAV of more than 400 Rs. for Rel. growth or around 200 Rs. for HDFC Top 200 are itself the indication of how much the compounding have worked in these funds. think over it.

    Thanks

    Ashal

  19. Sowmi says:

    Thank you all. For the past 3 months i am posting these questions in almost all the forums and most of the time it will get rejected politically. Luckily today i got this site and joined half hearted. I never thought that i meet these types of investment gurus and such a precise and crystal clear answers. I can’t express my joy and gratitude for you all. Thanks again. I will go and post these contents in all other sites so that others can also get benefited.

    1. Sowmi

      I can bet πŸ™‚ … this forum has some of the best people i know who are masters of personal finance , much better than CFP’s and so called Financial advisors πŸ™‚

  20. Sowmi – Few things:

    1) PPF investment is capped at 1 Lac per year. So even if you maximize this for 25 years you get no more than 85 Lacs. How far do you think this amount will take you in 2034? Little distance perhaps, not too far. Agreed that 85 lacs is not pittance of a corpus but still it is way short when you consider that inflation will eat up bulk of that value. Hence you need – and one MUST look to other avenues as well

    2) I dont understand why reinvestment is not compunding. In PPF you see real money (interest) being ‘reinvested’. (ie) returns earned are reinvested. In stocks the earnings is reinvested. A company needs to expand Plant, property and eipment (Fixed assets) to produce more and more and sell more and more to grow revenues and profits. This means they need cash inflows continuously which is provided by reinvesting the net income. Reinvesting is indeed compounding – just that in stocks it is not directly visible

    3)Take HDFC Top 200 (middle of list). It came out with NAV 10 and has grown some 20 times. Put this in Excel: = (201.285/10)^(1/15.5) – 1 = 0.2137 = A CAGR of 21.37% over 15.5 years – TAX FREE. Let me take the bottom guy in that group – Magnum Contra @ 502.. return is = (50.2/10)^(1/12.5)-1 = 0.2266 = 22.66% CAGR over 12.5 Years. You name it – the entire list and beyond has beaten Debt and even PPF returns over long periods.

    4) It is only 18 years since private mutual funds came out – (leave out the old era UTI). The India growth story is here to stay and it is very much possible to get atleast around 12% return for the next 1-2 decades.

    5) If someone enters the markets and exits the market at wrong times the product does not become bad. Anyone who had invested even in peak of Jan 2008 and continued the SIP in most of the above funds would have been better off as compared to the market. When the market returns to Jan 2008 levels again (or should I say Nov 2010!) – these people – if they have continued their SIP would reap enormous profits. Moneycontrol.com has nice SIP calculators as well – check out the future values of various SIP instruments started at diff points in time.

    6) More importantly the India growth story is intact. There are decades and decades of economic (and stock market) growth in the making. I only urge you not to miss the bus. After we become a very large economy then the current growth rates will cease. Until then enjoy the biggest boom to unfold. I am not hawking like the so-called-analsyts in the tvs but have a concrete convincing reason as follows. Here is my last bit: The long term return on Dow Jones over a 100 years is about 5%. US has had a historical avg inflation rate of 2% so the real growth of the US stock market is about 3% p.a for 100 years. Indian markets will revert to the global mean of 3% after being a matured market after 2-3 decades from now. Add to this the persistent inflation of about 7-8% and you will have 10+% growth even after 30 years. So if you last uestion is what if India’s inflation comes to only 3% when we become matured – we will get only 6% returns in stock market. True indeed. Well the answers lies in the uestion – The PPF returns at that point will be slashed to a little over 3% as well and will lag the stock market returns.

    7) The intent of this writeup is not to criticize PPF. PPF is by far the best debt instrument made available to Indian investors. Everyone MUST have PPF in their portfolio. However an Asset allocation alone will lead to ‘real wealth’ creation.

    Comments are definitely welcome.

    1. rajan.panchal24@gmail.com says:

      hey justgrowyourmoney. i have a query on your below comment :
      “Take HDFC Top 200 (middle of list). It came out with NAV 10 and has grown some 20 times. Put this in Excel: = (201.285/10)^(1/15.5) – 1 = 0.2137 = A CAGR of 21.37% over 15.5 years – TAX FREE. Let me take the bottom guy in that group – Magnum Contra @ 502.. return is = (50.2/10)^(1/12.5)-1 = 0.2266 = 22.66% CAGR over 12.5 Years. You name it – the entire list and beyond has beaten Debt and even PPF returns over long periods.”

      In calculation of CAGR, the begining value taken as 10 i.e. the value of nav when the fund came out and end value as 201.285. However if you see today, its already at a high value 201.382 (as on 30st march 2012). compared to its inceptiion value. so how you can expect that it will generate same or equivalent CAGR for next 15 years?Do you expect that in next 15 year the fund’s nav would be enough to achieve a CAGR of 22% or 15 % in15 years?

      1. Ramesh says:

        So, how much do you expect? What prevents it from achieving a rate of 12-15% CAGR over next 15-20 years? That is still going to beat PPF by a far margin.

        Remember, the NAV value is just a nominal value. You can actually buy 0.05 unit for Rs 10 (if NAV is 200). So, the absolute value of NAV is meaningless.

      2. Dear Rajan, please do understand, no body is giving any guarantee on the future performance of a MF. The past data is only an indication for future performance.

        Thanks

        Ashal

  21. Sowmi says:

    One more point. See the power of compounding after 20 years. If possible then extent this excel after 25 years and see the increase in final corpus. It is unimaginable. See this !!!
    I believe PPF works in the same way and gives this same benefit as mentioned in the below link. Isn’t ?

    http://www.greekshares.com/8th.php

  22. Sowmi says:

    Dear Ashal,

    I took the below info from value research online and don’t have patience πŸ™ to get the left ones. Hope this is enough for our further discussion.

    Fund Name Inception Date “Current NAV (as of 07 feb 2012)”

    Rel Growth Oct-95 427.6647 (06/02/12)
    Rel. Vision Oct-95 249.7485 (06/02/12)
    HDFC Top 200 Sep-96 201.285 (06/02/12)
    HDFC Eq. Dec-94 258.322 (06/02/12)
    HDFC Prudence Dec-94 212.005 (06/02/12)
    Magnum Contra Jul-99 50.2 (06/02/12)

    Dear justgrowmymoney ,

    Thanks for the information. My further followup points are given below.

    End of the day i need best returns so let us very well compare products which belongs to either debt or equity Here actually i initiated this thread to know whether any product exists similar to PPF for long term investment of above 20 , 25 or 30 years and it seems MF SIP is a close contender. So let us explore further in this perspective.

    It seems you tried to explain even in MF SIP the compounding concept is exists. Fine. But still i am not sure whether it works in a same way like PPF. Also i don’t think re investment is compounding. what about other statements in my questions. are you agreeing with this or not ?

    I attached a excel for PPF outcome. Please let me know whether any SIP product exists to give a similar CAGR for long term investments.

    Also do you think we can expect the same return as we got in last 15 years. Please note not only MF SIP even in Real Estate we have seen unprecedented appreciation and in my view both have reached a some concrete stage. Yes there will be appreciation in both MF SIP and real estate but the golden times what we experienced in last 15 years are all over. I am reluctant to expect the same in next 15 to 30 years. But i can bet with PPF. Hope i am communicating.

    Thanks
    Sowmi
    [file]http://localhost/jagoforum2/readers-files/SowmiRetirementPlanningusingPPF_Calculator.xls[/file]

    1. Ramesh says:

      According to your excel sheet, if you invest 1 lakh per year @ 8%, after 25 years you will get around 83 lakhs (on a total principal investment of 25 lakhs).
      First the problems:
      1. PPF interest rates will now onwards fluctutate every year according to long term govt bond rates.
      2. Inflation is above 10%, and the investment return of 8% (or 8.6%) is below inflation.

      As mentioned by Ashal about the various good equity schemes. These schemes have given around 18-25% return compounded yearly since last 15 years. In short, if you had invested 1 lakh every year in say HDFC top 200, @ 20% per year, you would have got over 1 crore in 15 years (at a principal amount of 15 lakhs). Corresponding amount in PPF would have been 27 lakhs.

      You need to clear up your concepts of compounding.

      Ramesh

  23. Sowmi – You are comparing a Debt product with a Equity oriented SIP – but lets discuss this in detail.

    Any portfolio – right from a 18 year old who started investing to a 80+ or even a 90+ individual must have a portfolio comprised of both Debt and Equity. A detailed treatment of why Asset allocation is important is available here – http://wp.me/p1Y418-24.

    PPF is a wonderful product and in my opinion everyone MUST load this one upto 1 lac each year (assuming you also are able to invest in equity). If a lumpsum is not possible just treat this like an EMI and deposit ~ 8500 each month to maximize.

    Having said that MF SIPs are a very important product/tool to build great wealth. You had a query on compounding. There definitely is compunding in PPF visible to the common eye. Here is how there is compounding in MF as well (explained). So what do MFs do? They buy a large basket of stocks. What are these stocks anyways? Stocks represent interest in real businesses. You become a businessman by investing in stocks. Businesses make money by doing best what they know. Assume a business makes a profit after tax (Net Income) of Rs. 10 per share. The firm may choose to distribute some or all or no money to investors. Lets assume the dividend policy states that 20% Net income be distributed. So Rs. 2 is given as dividend and Rs. 8 is reinvested back in to the firm. This reinvestment is precisely the compounding that you experience in a Debt product – where the numbers are visible to plain eyes. The firm ploughs back this dividend and may makes more profits the next year and the cycle continues which reflect in stock prices and so the NAVs.

    Stock prices (so MF NAVs) are a function of sales and earnings which automatically go up with inflation which is why stocks are called as hedge against inflation.

    Duration of product:
    PPF is a Govt sponsored scheme and we are guaranteed to get these returns. Returns on a private enterprise are never guaranteed, agreed. However if you go back and look at some schemes like HDFC Top 200 or FT Bluechip – they have beat the stock index by a good margin over a period of 15 years. Remember that even a 1% difference in return can make a huge difference in the final corpus over a period of 20 years. 1 Lac invested at 8% in PPF and 12% in a diversified MF will generate 50 lacs and 80 lacs respectively. With a annual limit of 1 Lac PPF ends up as a useful wealth generator but just that. A financial plan based on debt alone or Equity alone is bound to fail. You must do a broad based Asset alocation and regular rebalancing. Take to PPF for stability and MF SIPs for Growth.

    India is on the verge of great development at this point in time. It is like the state of USA few years after the Second World War where rapid infrastructure developments in 1950s eventually lead them to be an economic giant. If as a country our fiscal policies are sound we are looking at 1-2 decades of robust economic (and stock market) growth. A long term return of 12% over a period of 15-20 years is definitely possible.

  24. Dear Sowmi, Please inform me the current date NAV of following funds in growth option –

    Rel. Growth
    Rel. Vision
    HDFC Top 200
    HDFC Eq.
    HDFC Prudence
    Franklin India bluechip
    Magnum Global
    Magnum Contra

    Please do one more thing – quote the inception date also for each of these funds.

    I’ll share with you, my views once your reply with the demanded details is there.

    Thanks

    Ashal

    1. Anubhav Ranjan says:

      Check current NAV of all funds at moneycontrol.com

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