If a cyclist and a motorist run a race, who do you think will win? The answer is a no brainer. One is a human powered mode of transport and the other is a machine.
Although both are vehicles, is the comparison about who is the fastest, rational?
Likewise, in investing, it is an unfortunate truism, that investors compare different investment products, solely on the basis of just one element – Returns. Although there is no harm, investors often fail to realise they are comparing apples with oranges.
To be specific, Public Provident Fund (PPF) and equity linked saving scheme (ELSS) mutual fund are one of the most commonly compared products. Just google the term PPF vs ELSS and you will find countless articles written on which is the better option. Is there any similarity between the two? Apart from the fact that they both are investment products and qualify for section 80C deduction, they are poles apart.
PPF invests an investor’s money in fixed income options and ELSS invest in the stock markets. Besides the underlying asset, the risk taken, the lock-in period, the withdrawal rules, the taxation rules – everything is different. The comparison hence is blatantly incongruous.
A finfluencer had emphatically tweeted about why working youngsters should invest only in ELSS and avoid PPF, thereby not compromising on liquidity and returns. His biased view was illustrated through a 15-year graph comparing a smooth 12 per cent compounded annual growth rate of ELSS vis-a-vis the 7 per cent PPF return.
This comparison was misleading since equity returns are not linear every year. Further, his blanket recommendation did not discount the fact that every investor has a risk appetite and could behave negatively during a market downturn. The investor could stop the SIP in ELSS or worse, even redeem the investment, turning the notional loss into actual on contributions completing 3 year lock-in period.
On the other hand, PPF, a 15-year investment product, inculcates investment discipline and has relatively rigid withdrawal rules. With negligible risk, this sovereign backed product presently provides 7 per cent tax free returns. Thanks to the power of compounding, the swelled PPF kitty at retirement offers good source of tax-free interest annually. More importantly, it provides stability to the overall portfolio, with the investor at peace as the fixed income side (debt) of the portfolio keeps growing when the equity side is down.
Different asset classes behave differently under different economic conditions and each has a role to play in an investor’s portfolio. Anyone who understands the fundamental principles of asset allocation would know that diversification is the key to successful investing. A portfolio should be ideally distributed across diverse asset classes – equity, debt, gold. Real estate also could be an option but not for everyone. If we consider the primary 2 buckets of asset allocation – equity and fixed income (debt) – it is not a question of either, or. Both are much needed in an investment portfolio. While the debt portion provides stability, liquidity and meeting short/long term goals, the equity bucket helps to beat inflation and meeting the long-term goals in a portfolio. This equity:debt proportion would primarily depend upon an investor’s risk appetite, financial situation and time horizon of goals.
Rather than having a blinkered approach for every investment decision, investors need to look at the big picture – their asset allocation. This would enable them to take a holistic decision and not choose one product over the other based on just returns.
Comparison is destruction and a flawed one in the world of investing, certainly is!