PPF vs Gilt mutual funds: Which has done better over 15 years?

Last Updated on December 29, 2021 at 5:40 pm

While the Public provident fund offers risk-free, gradually varying returns, a govt bond provides risk-free, constant income. If we buy it via a gilt mutual fund then its daily value depends on market supply and demand. The risk, although lower than equity or gold is still significantly high. There are some advantages of using gilt mutual funds as a primary fixed income instrument for long-term goals. However, have they done better than PPF? Do gilt mutual funds offer a commensurate reward for the risk taken?

We study rolling SIp returns of the I-BEX Sov Gilt Index from 1st Aug 1994 to 7th Aug 1994 over every possible 15 year periods. That is, from 01-08-1994 to 01-08-2009 would the first 15-year SIP with a return of 11.3%. Then from 01-09-1994 to 01-09-2009  would be the second 15-year SIP with a return of 10.95% and so on.

We shall compare 134 such 15-year gilt fund SIP windows with the average PPF return during this period. Before that some context is necessary. An investor might ask, “why should I invest in a gilt mutual fund and take on additional risk when I sleep peacefully by investing in the PPF?”.

First of all, “15 years” is only a representative long term window. Second of all, not every requirement can be met with a PPF account. Third of all, PPF comes with a maximum investment limit which is not suitable for many goals. Thus an efficient long-term fixed-income option is a requirement for many situations.

Investing in a gilt mutual fund avoid credit risk but that benefit comes with a price – higher volatility and long periods of poor returns. An investor who appreciates basic portfolio management can utility this volatility and rebalance efficiently with equity. A PPF account can also be used as a goal-based buffer to secure profits from both equity and gilts progressivley as the goal-deadline approaches.

We have already shown the benefits of investing in gilt mutual funds via SIP and also tactical entry and exit: Can we get better returns by timing entry & exit from gilt mutual funds? In this article, we shall consider the “risk premium” associated with gilts. Do they provide commensurate reward compared to PPF for the additional risk taken? PPF here is only a representative of “high interest secure small saving schemes”. It can easily be replaced by a simple post office RD or FD or KVP etc.

Please note that that we are only evaluating the risk premium of a gilt mutual fund. If you agree, “I will have to pay tax if I invest in gilt MF while PPF is tax-free” then you are ignoring both goal-based investing and portfolio management. We will need to venture beyond tax-free investment to create a corpus for our future needs.

If we take historical PPF interest rates, convert them into a monthly return and project it as a mutual fund NAV then this is how it would have evolved from Aug 1994. Both the risk associated with gilt funds and the potential reward is visible.

The 15-year rolling SIP returns for the gilt index and PPF index (as derived above) is shown below.

That is a fairly impressive performance. Naturally one cannot expect gilt mutual funds to outperform PPF every time as it is directly market-linked. The gradual fall in interest rates and the cyclic nature of gilt outperformance can also be seen.

For the time period tested – Aug 1994 to Aug 2020, a gilt index has provided a reasonable risk premium with respect to PPF. Naturally taxes and exit loads would lower this gap but there is no way around those.

In conclusion, gilt mutual funds are a compelling choice for long-term goals with appropriate asset allocation. It can be used in situations where PPF is not appropriate (for example an 8 to 14-year need) or in addition to PPF and appropriate equity exposure as per the need of the goal.