PPF regains the crown with the best returns

Risk shunners won and thumbed their noses at equity investors in 2018. The Public Provident Fund (PPF), the one true friend of many middle-class Indians, regained its pole position this year with an annual post-tax return of 7.7%.

The National Savings Certificate also returned 7.7%, but post tax, PPF turns out better. For the guaranteed return-seeking investor, there were several other products that did well in this space (see chart). The top five ultra short-term debt funds, which invest in securities with maturities between three months and six months, returned an average of 7.78%, but this was not a guaranteed return.

It was a year when it paid to play safe. But the reason for high returns in guaranteed income products was also one of the causes for conflict between the government and the Reserve Bank of India (RBI). Anticipating that inflation would quicken, RBI kept policy rates high, impacting the rates on 10-year government securities (G-Sec). That, in turn, influenced returns on a whole raft of products that are benchmarked to the G-Sec rate.

For example, the PPF rate is always 25 basis points higher than the 10-year G-Sec rate. Other products too benefited from the high policy rates and with inflation at 4.74%, the real return (the extra return over inflation) remained very high for fixed-income products. “The RBI hiked policy rates in 2018 in response to the MPC’s (monetary policy committee’s) stance on inflation and liquidity. Well-capitalized banks raised fixed deposit rates to accommodate the expansion seen in credit growth,” said Rajiv Anand, executive director of Axis Bank. “As a consequence of RBI’s actions, real returns from financial products whose yields are affected by the policy rates, including fixed deposits and small savings schemes, rose. With inflation below 4%, the bias for real and nominal rates is to the downside.”

In contrast, it was a bad year for stock pickers, with mid- and small-cap shares falling sharply.

The National Stock Exchange’s Nifty index gained 2.69%, generating a negative return post inflation.

“In 2018, we observed some payback as volatility returned on the back of global and domestic headwinds, particularly higher interest rates, jump in oil prices and large foreign outflows,” said Manish Gunwani, chief investment officer, equity investment, Reliance Nippon Life Asset Management Ltd.

Investors who looked at last year’s winner in 2018 did badly. The one-year total return on Nifty Midcap 100 index in 2017 was 49%, making fixed deposits and PPF look poor investments in comparison.

Investors in 2019, who look at 2018 returns and rush to invest in PPF, fixed deposits and gold, may be making a similar mistake. Instead, a well-balanced portfolio with some investments in safe products and some in equity would be a better choice.

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