ppf test for stock market returns

So here is the example. Suppose an investor invested in shares on 8th January 2008. This was the day when stock prices reached their peak. Suppose the investor had bought the shares of Nifty 50 index on that day.

Also, in the last few years, the investor held the stocks in the Nifty 50 index at any point in time. This means that if a stock was removed from the index and a new stock was added, the investor did the same. For the sake of calculation, we also assume that the act of selling the stock and buying a new one was costly (which is not the case in real life). Also, any dividend received was reinvested in buying Nifty stock.

Taking these assumptions into account, the return on the investor’s portfolio between January 8, 2008 and September 30, 2022 would have been 8.3% p.a. This is the return per annum on the Nifty 50 Total Return Index between then and 30 September. The total return index also takes into account the dividends paid by companies.

The MF CEO’s tweet said that the return on the Nifty Total Return Index was 8.4% per annum. The difference is not substantial and hence, can be ignored.

Now let’s compare this with the returns you get on investing in Public Provident Fund (PPF). The MF CEO’s tweet shows that the return on investment in PPF will also be 8.4% per annum. Calculations made by this author suggest that the return would have been around 8.1% per year.

Even if the return on PPF has been 8.1% or 8.4%, the thing is, if you are earning an almost guaranteed return of 8.1% on PPF, why would you want to risk investing in stocks to earn 8.3 percent. % or 8.4% per annum?

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

Given the fact that prices have fallen 60% within months of the stock market reaching its peak, it seems fair to say that we have cherry-picked data to draw the conclusions we want. Were. It has been well documented that over time, the returns from investing in stocks are likely to outperform those from investing in any other asset class.

However, it is looking at things from just one angle. While investing in stocks can yield better returns over time, the question is, are investors benefiting from it? Are investors also earning such high returns?

When you invest at the peak

Let us specifically consider the month of January 2008. The net inflow into equity mutual funds in that month was 12,717 crores. The Center for Monitoring Indian Economy provides data for net inflows into equity mutual funds since October 1999 and this was the highest ever inflows. As of January 2008, equity mutual funds under management accounted for about 7.4% of the total assets under management in just one month.

there was another pure flow of 6,756 crore in equity mutual funds in February 2008. In fact, the net flow of 12,717 crore in January 2008, almost a decade later, was crossed in August 2017.

So, the point here is that looking at stock market returns from the extreme can be cherry-picking data, yet, the fact remains that a vast majority of retail investors invest in stocks either directly or indirectly after investing in stocks. makes investments. Have done well for some time and are bidding around their peak level.

In fact, mutual funds understood this very well at that time and launched six new equity schemes during January 2008. Overall seen in these plans. In this, an investment of Rs 8,994 crore is being made. In fact, this was the second largest ever inflow into equity mutual funds through the launch of new schemes during the period October 1999 to March 2019.

Of course, in addition to mutual fund investors, there will be investors who also bought the stock directly in January 2008. The probability is the average return of these investors who bought the stock directly and indirectly, assuming they had put the stock on hold. His investment so far will be pretty average.

Now let’s consider more data points.

Nifty 50 Total Return Index starts from June 1999. Therefore, for the period prior to that we have to consider the BSE Sensex, which has data from April 1979. On 12 September 1994, the Sensex reached its peak of 4,631 points. Since then the annual return between 30 September 2022 is 9.4%. Of course, this takes into account the dividends paid by the stocks that constitute the Sensex. We can assume that the return due to reinvestment of dividends is another 1% per annum.

In comparison, investing in PPF between then and now gives a return of 9% per annum, which is slightly less than investing in stocks. Nonetheless, some points need to be considered. Investing in PPF saves tax. The same is not true of stocks unless one is specifically buying tax-saving mutual funds.

Over the years, long-term capital gains on shares have become taxable. Also, investing in stocks comes with a lot of risk, as PPF is backed by the government. Once we have considered these points, we can conclude that the returns on PPF between September 1994 and now the Sensex more or less match the investment in a wide basket of stocks.

Of course, on the other hand, there has always been a limit to the amount that can be invested in a Public Provident Fund during a given year. that limit is currently 1.5 lakh.

Back in 1994, 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. Public sector mutual funds were around before that. Unit Trust of India was established in 1963 and other public sector mutual funds entered the business in 1987.

When the stock market reached its peak in 1994, a large number of Initial Public Offerings (IPOs) entered the market. Thousands of crores were raised from retail investors. Many of these companies raised money and then disappeared. In popular parlance, this is known as the vanishing companies scam. This again shows that many retail investors get into the stock market only around the time when it peaks.

Now consider April 12, 1992, when the BSE Sensex reached its all-time peak of 4,467 points. It was around that time that Harshad Mehta was playing the role of Pidder and was attracting retail investors to the stock. The stock market gives an 8.8% return per year between then and now. Considering that Sensex does not account for dividends paid by companies, we can safely say that the overall return will be around 10% per annum. In comparison, the return on PPF between then and now is also 10% per annum. Clearly, if you are the type who invests in stocks only around the time when they peak, you are much better off investing in PPF.

then and Now

What does this mean in the current scheme of things? What happened in the past has also happened in the last two years. Take a look at Chart 1 and Chart 2. The chart shows the higher inflows of Sensex during that particular month as compared to the net inflows into Equity Mutual Funds in a given month since 1st April 2019.

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

It was as if 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 amount of total inflows in the last one year 1.84 trillion. This solid flow began after the BSE Sensex touched an all-time high of 62,245 points in October 2021. In fact, the last one year has been a time when stock prices have been consistently at their all-time highs.

Now take a look at Chart 2. It shows the number of demat accounts in existence at the end of a particular month and the highest level achieved by the Sensex during that month. Since the Sensex has risen in the last two years, the number of demat accounts opened has also increased at a rapid pace. The number of demat accounts stood at 46.6 million in September 2020. By September 2022, they had more than doubled to 102.6 million.

not cherry-picking

Controversially, many investors rush to buy stocks, directly or indirectly, when their price rises significantly, which is why stocks can deliver good returns over time, but this is not necessarily the case for many investors. Earning returns. Hence, comparing the returns on stocks from their high points with the returns generated by PPF is not really cherry-picking. It should be par for the course.

Of course, it will be difficult for many investors who have come to the stock market party over the past year to earn the kind of high returns that fund managers base their investment pitches on.

While forecasting the future is a mug game, those who have invested a good amount of money in the past one year should consider themselves lucky if the rate of return over a period of time outweighs the returns generated by investing in PPF.

There are one or two results. The data shared here does not imply that the PPF returns beat the returns generated by the stock market in all situations. Yet these are very specific but important situations. In fact, a simple systematic investment plan (SIP) in an equity mutual fund over the long term is likely to generate better returns than all other asset classes. But then it is a very boring way to invest and most of the investors want excitement from their investments.

Moreover, what is true of stocks is also true of other asset classes. People rush to invest in them only when they become very fast. Cryptos is a good recent example, where many investors burned their hands after the price of bitcoin, the most popular crypto, crossed $50,000.

Before crypto, real estate was a classic example. Many investors jumped into buying real estate after 2008 and 2009, as prices had already risen significantly. More than a few builders took advantage of this enthusiasm. They either took the money and disappeared or diverted it to other avenues. Some of these investors are still waiting for the delivery of their homes.

Vivek Kaul is a writer and economic commentator.