PPF NSC MF NPS Choosing Wisely

While mutual fund score over government schemes in long term returns, latter cannot be completely ignored.

While saving physical cash is important especially in today’s uncertain life, it has become important to invest, as it not only protects the purchasing power but also helps generate wealth. Demonetisation in 2016 has also triggered the investment habit or culture in India.

While equity investments are the best tool for creating wealth in the long-term, still very small portion (less than 3 per cent) of the Indian population invests in stock market directly. One of the reasons for such lower participation is high volatility in the stock market.

On the other hand, mutual funds are also gaining momentum with target of reaching AUM (Assets Under Management) of 100 lakh crores by 2025, says AMFI BCG report. Said that, the role of mutual funds is increasing as they are relatively safer means to invest than investing directly into stocks. But again, the share is still less than 5 per cent as most people usually prefer traditional life insurance policies and government schemes. They choose insurance policies as they are sure that at least they would receive something at maturity and they invest in government schemes as they are purely backed by the government which won’t default on their investments. So, where should you invest? You will get all the answers in this story. Before comparing government schemes with mutual funds, we would first understand them in brief.

Mutual funds

A mutual fund is basically a portfolio of securities, which is formed by pooling the money from various investors with a similar investment objective. There are various kinds of mutual funds to cater different investment needs, objectives, risk profiles and investment horizons. Hence, mutual fund is often considered to be an ideal way to grow wealth.

Government schemes

Government schemes are backed by the Government of India (GoI). They are risk free and hence generally offer lower returns compared to other riskier products. They come with long lock-in periods and are relatively less liquid.

There are various government schemes like PPF (Public Provident Fund), NPS (National Pension System), Sukanya Samriddhi Yojana and SCSS (Senior Citizen Savings Scheme). However, among them government schemes like Sukanya Samriddhi Yojana and Senior Citizen Saving Schemes do offer attractive interest rates but are less flexible and also comes with a cap on investment amount. Being said that, National Pension System is an exception to this.

Government schemes vs Mutual funds

As we know there are different government schemes available, it is important to understand them individually as they have different structures altogether. In this section, we will make you understand different types of government schemes and how they compare with mutual funds in terms of risk and return. To serve the purpose, we carried out a study wherein we have assumed that you invest Rs. 1,50,000 at the start of the year in previous year’s best performing large cap dedicated equity mutual fund. The similar amount is invested in the government schemes at the start of the year. You continue this investing process till 2019. To make returns comparable, we have accounted for long-term capital gains tax on large cap MF.

Public Provident Fund (PPF)

PPF is one of the few government schemes that offer EEE (Exempt-Exempt-Exempt) benefit. In other words, the investment qualifies for deduction under section 80C of Income Tax Act, the interest earned and the entire withdrawal amount at maturity is tax free. In terms of returns, investors had some good time in past wherein it provided returns of even 12 per cent. Needless to say, people who invested in the period of 1986 to 2000 might have created good amount of wealth by investing in PPF as this came to them as risk free. However, story ended post the year 2000 wherein it never saw such a return again. However, now for years the rate of interest offered by PPF is 7.8-8.0 per cent.



As we can see from the above chart, if you had invested Rs. 1.5 lakh in PPF for 10 years (total investment of Rs. 15 lakh), you might have accumulated Rs. 23.86 lakh in a decade. But if you had invested the same amount in a previous year's best performing large cap equity mutual fund then you might have accumulated a larger amount of Rs. 27.90 lakh, which is around 17 per cent more than PPF.

Sukanya Samriddhi Yojana (SSY) 

SSY was launched in December 2014 under “Beti Bachao Aur Beti Padhao” campaign by GoI. This was done with an intention to save the girl child and help their parents to fund their education and marriage. The tenure of the deposit is up to 21 years but the maximum period up to which deposits can be made is 15 years. Like PPF, SSY also offers EEE status and is also eligible for deduction under section 80C of Income Tax Act. When SSY was launched the rate of interest was 9.10 per cent which gradually declined to 8.28 per cent. The current interest rate offered is 8.40 per cent.



Data available for SSY returns is limited as it was launched in the year 2014. As one can see, the large cap fund has performed in line with SSY. If you had invested Rs. 1.5 lakh for five years (total investment of Rs. 7.5 lakh) in SSY, then you might have accumulated Rs. 9.66 lakh at the end of fifth year while large cap funds would have given you a little less amount of Rs. 9.63 lakh (underperformance of mere 0.37 per cent). However, there is a potential for large cap funds to perform better than SSY given the falling interest rate scenario and long-term performance of large cap funds.

Senior Citizen Savings Scheme (SCSS)

SCSS is specifically for the retired people (aged over 60 years) that offers regular income. Scheme maturity is after five years from the date of account opening but can be further extended by an additional three years. From 2010 to 2019 the highest rate provided by SCSS is 9.30 per cent and from this high it had seen a low of 8.33 per cent. The current rate of interest offered is 8.43 per cent, which is highest among all the small savings schemes in India.



From the above chart, it is clear that investment in previous year’s best performing large cap fund performs better than SCSS. Investment of Rs. 1.5 lakh for 10 years (total investment Rs. 15 lakh) in SCSS would have fetched Rs. 24.62 lakh today as against Rs. 27.90 lakh in large cap funds (an outperformance of 13.32 per cent over SCSS).

National Savings Certificate (NSC) The National Savings Certificate is a fixed income investment scheme which is a GoI initiative that urges investors, especially to the people with small to medium income, to save and invest and enjoy tax savings along with it. Like other government schemes, NSC is also a low-risk, low-return product. One can visit nearest post office to invest in this scheme. Though there is no maximum limit on investment in NSCs, only investments of up to Rs. 1.5 lakh is eligible under Section 80C of the Income Tax Act. However, like PPF and SSY it doesn’t enjoy the EEE status. The highest rate of interest of 8.50 per cent was provided by NSC in the period starting from 2010 to 2019 which went to form a low of 7.78 per cent. The current interest rate stands at 7.86 per cent.

As we can see from the above chart that large cap fund performs better than NSC in the long-term. Investment of Rs. 1.5 lakh for 10 years (total investment of Rs. 15 lakh) in NSC would have fetched Rs. 23.66 lakh today. However large cap funds have outperformed NSC by 17.90 per cent in the same period fetching Rs. 27.90 lakh.

National Pension System (NPS) 

NPS was launched in 2004 for government employees but extended to all sections in 2009. In this scheme, an investor can contribute to a pension account on a regular basis during his/her working life. A part of the corpus can be withdrawn in lumpsum and the remaining amount is to be used to buy an immediate annuity for secured regular income during retirement.

Unlike PPF and other savings schemes, NPS doesn’t have a fixed rate of interest. It works similar to a mutual fund wherein you can invest in equity (maximum 75 per cent), government securities and corporate bonds. Recently the government added alternative investment as well. Hence returns are volatile in nature. Only Tier I equity part of NPS has been considered for return comparison.

The above chart shows that returns for both NPS as well as large cap funds are more or less in line with each other. Investment of Rs. 1.5 lakh for 10 years (total investment of Rs. 15 lakh) in NPS and large cap equity fund would fetch Rs. 27.29 lakh and Rs. 27.90 lakh respectively. Large cap funds have outperformed NPS by 2.24 per cent.

Conclusion

The above analysis shows that mutual funds have outperformed most of the government schemes. Thus, one might conclude that investing in mutual funds is anytime a better option than government schemes. However, one needs to understand that every investment serves a different purpose and comes with a different risk profile. If you are a person who doesn’t want to risk his capital then it is always advisable to go ahead and invest in government schemes. However, being an investor who has ability and willingness to take risk, you should definitely consider mutual funds over government schemes.

From a retirement planning perspective, you should opt for NPS and mutual funds in pre-retirement phase while SCSS and mutual funds is suited in post-retirement phase. For girl child’s education and marriage consider Sukanya Samriddhi Yojana and mutual funds. For child’s education and marriage can consider investing in PPF and mutual funds.

Investors with least risk appetite or those looking for regular income should invest in government schemes. Except NPS, all government schemes have a low risk - low returns profile. Although, you can certainly avoid investing in NSC, but a person with very low risk profile who is looking for capital protection can consider investing in them.

One should definitely consider investing in government schemes as far as debt part of your portfolio is concerned. This is because they are not just tax friendly, they are currently also providing attractive interest rates at very low risk which even some of the debt mutual funds are not able to match. However, government schemes cannot be considered as a tool for wealth creation as some of the schemes have ceiling on maximum amount on investment.

Mutual fund is also one of the integral parts of your investment portfolio. Investors with moderate to high risk should consider mutual funds. Seeking expert advice is always advisable before building investment portfolio.