Should I invest in PPF or Index Fund for a tenure of 15 years?

Name withheld on request

Over the past 15 years, PPF interest rates have ranged between 8.8% on the high side and 7.1% on the low side. While this rate has been as high as 12% in the past, it is unlikely to happen again in the near future. The interest rate is determined by the government every quarter. The PPF interest rate has been fixed at 7.10 per cent for the October-December quarter of the financial year 2022-23. An average rate of 8% would be reasonable if not secure for the next 10+ years, although there is a distinct possibility of going lower.

On the other hand, Index Funds (based on Nifty 50 Index) have given 9.13% returns over the last 15 years but over 13% returns over the last 3, 5 and 10 year periods. Going forward, one can expect 10-12% returns from this category over the next 10+ years. From a taxation perspective, returns from index investments will be subject to 10% taxation after the first 1 lakh in profit. Long-term capital gains tax rate of 10% is applicable on mutual fund units sold after one year of holding.

Hence, the post-tax returns from index investing would be around 9 to 11% (CAGR).

So, your choices are an investment that will yield around 8% or less and an investment that can yield 10% or more. Although the latter number is a more probable number than the former, given the time horizon for which you are investing, the potential for higher returns from index investing is greater.

An additional return of 1 to 3% over the long term can add up to a significant difference to the corpus. Hence, considering your long-term horizon, it would make sense to invest in index funds instead of fixed return investments like PPF. You can invest in index funds like UTI Nifty Index Fund for this.

Shrikant Meenakshi is the Co-Founder at PrimeInvestor.