Till very recently, there was a steadily growing interest among small investors about PMS. In fact, the number of queries on lines of ‘Is PMS better than mutual funds?’ saw a constant rise in the last few years.
And why not?
After all, the Portfolio Management Service or PMS had long been perceived as some sort of exotic investment product, which offered high returns to sophisticated investors.
But after the recent (and I am afraid ongoing) stock market carnage, especially in the non-large cap space where most of these PMS schemes operate in, the PMS investors have experienced the obvious-but-often-forgotten downside of high-risk taking.
No… I am not pointing any fingers on any PMS fund managers here.
PMS schemes, by design, are high-risk products which are focused on enhancing returns for investors by taking (and not surprisingly) very high concentrated risks at times. Sometimes this works and the results are phenomenal (If you search for the returns delivered by best portfolio management services in India in good years, you will understand how much). But at other times, it doesn’t and the results are horrible.
PMS is an equity product and falls on the higher end of the risk spectrum. And due to its concentrated portfolio and the high inherent risk, it is best suited for investors with prior market knowledge and understanding.
But small investors are small investors for a reason. 😉 Lured by the eye-popping claims* of high returns made by the PMS funds in India, many small less experienced and gullible investors got attracted to PMS funds in recent times. Unfortunately, they focused just on the returns and not on the risks.
It was exactly like trying to cover a 500-km journey fast by driving at 150+ kmph. You may reach the destination in 3.5 hours. But at such high speeds, there is an obvious risk of life-ending accidents.
Same is the case with PMS. High speed (returns) come with high risk-taking. Plain and simple.
* Not all PMS do well as it seems to outsiders. Many can’t even beat simple well-diversified equity funds.
At the cost of sounding repetitive, I would say that when it comes to equity, most Indian investors are better suited for the Mutual Funds. In the choice of PMS vs Mutual Funds, it can be said that PMS is best left for people who actually understand the consequences of high-risk strategies and have decently large portfolios (of which a small part can be parked in high-risk strategies like PMS).
That brings us to the differences between PMS and Mutual Fund.
Let’s instead see what a PMS exactly is and then we will discuss what suits whom.
Portfolio Management Service or PMS is an investment vehicle that replicates investment strategies made available by the PMS fund manager in the client’s portfolios.
There is a perception that PMS offers a great degree of customization. And this is considered by many as one of the key benefits of Portfolio Management Services apart from the perception of a high-return-promise. But this isn’t the case for every PMS or for every PMS investor. Most PMS offer standardized model portfolios for smaller clients. Once a client is on-boarded, the manager will try to replicate the client portfolio to as close to the model portfolio as possible. But the real customization is available only to the large clients – who can invest atleast a few crores in the PMS. If the client account size is big enough, the PMS manager will give proportionately large attention to the creation of a customized portfolio (broadly in line with PMS model portfolio or strategy if need be) to cater to the client needs. Remember, Such levels of customization is not available for smaller PMS clients.
Unlike mutual funds which are tightly regulated by SEBI and to some extent AMFI, the PMS is very less regulated and hence, allows fund managers to take a lot of risks. This can also be seen as extra flexibility available to PMS managers. But this no doubt increases the risk too as the fund manager has a free hand.
So for less experienced clients, such a level of risk-taking isn’t even required.
Note – And if you do check portfolio management services SEBI circulars and compare it with those of mutual funds, you will also realize that PMS managers are less answerable than MF AMCs.
Since the risks are high in PMS, the regulator has set a minimum investment limit of Rs 25 lakh in PMS to keep it out of reach of very small investors. Whereas in Mutual funds, you already know that you can even start with Rs 1000 per month SIP.
The most important thing apart from the highly risky nature of the product itself is the high fee that PMS charges. In MFs, you pay about 1-2% on the amount as expenses. In PMS, the fee has 3 distinct components:
Upfront setup fee paid during the initial investment
Fixed ongoing Management fee (annual fee)
Performance fees – generally as a share in profits generated
The basic fixed (on-going annual) fee is 2-2.5% per annum. But depending on the size of individual accounts, the on-going fee or performance fee is based on mutual agreement. So for example, someone investing the minimum Rs 25 lakh in a PMS may have to pay a 2.5% recurring annual fee whereas a Rs 5 crore investor in the same PMS strategy may be paying a lower fee (1-1.5%) as he brought in more money to the table.
Apart from the annual fixed fee (and unlike in MFs), PMS also has performance-linked fees (called profit share). This applies when the gains cross a predetermined level.
For example, a PMS can have multiple offerings like:
50% annual fee + performance fee of 10% of the gains above 15%
50% annual fee + performance fee of 15% of the gains above 12%
25% annual fee + performance fee of 20% of the gains above 10%
This fixed fee + performance fee structure makes PMS cost higher and it eventually eats into the portfolio returns if the returns aren’t being delivered. And given the high risk that comes associated with PMS investments (and for those who aren’t very aggressive), mutual funds are more prudent investment option in equity and far cheaper. Remember, the investor can negotiate the fee with PMS providers depending on how much money he is investing with them.
But think about it – PMS which were earlier considered a product for the rich and the sophisticated, are now being pushed by agents, distributors and banks much more aggressively to everyone capable of sparing Rs 25 lac!
Why is it?
I will tell you.
SEBI, the regulator has been steadily curbing the commissions on the sale of mutual funds. So the distributors get attracted to the relatively high upfront commissions given to them by PMS operators. So the distributors, in order to protect their income are hard-selling clients to opt for these high-upfront-commission PMS schemes in spite of knowing that they might be unsuitable for them.
Now you know why its gaining popularity 😉
Is PMS for you?
I will put this very plainly here.
Based on the little experience I have and things I understand (or atleast feel that I understand…), most people are better off not investing in PMS. When it comes to equity investing, most people are best served by investing in mutual funds alone.
In any case, the entry limit of Rs 25 lac is high enough for very small investors.
But just because you have Rs 25 lac to invest in equity doesn’t mean that you are suited to invest in PMS. Just because you can doesn’t mean you should.
PMS is suitable for high net worth (affluent) and institutional investors with a suitably large investment portfolio. There is no perfect threshold figure here but let’s say that unless you have a few crores to invest, you shouldn’t even think about PMS.
And since the product is high-risk, its best to keep exposure limited to a small percentage of the overall portfolio if you eventually do invest in it.
So for example – Let’s say your overall portfolio is Rs 10 Cr. Now based on some goal-based analysis, it is found that your asset allocation should be 50:50 equity debt. So that means Rs 5 Cr for equity and the other Rs 5 Cr for debt. Now out of the Rs 5 Cr for equity, it’s best to limit the PMS exposure to 10-20% here for most large and aggressive investors too.
Because just because you are investing in equity doesn’t mean that you go straight full to the highest risk component. You divide the equity corpus between various levels of risk. Right? That’s how a prudent portfolio is built.
It is also suited for more sophisticated clients having large portfolios who wish to invest in themes that aren’t easily available through mutual fund portfolios. In such cases, the PMS manager can create tailor-made solutions for larger clients.
Sorry for this long rant.
If you have had enough of this Mutual Fund vs PMS debate, and wish to go away with just a few things from this article, then here they are:
PMS is a high-risk equity product which is suitable for sophisticated investors who know what high-risk concentrated equity portfolio investing really is.
PMS is not suitable for small investors.
Just because you have Rs 25 lac (minimum required) to invest doesn’t mean that you are suitable to be a PMS investor
If your agent, bank is pushing you to buy it then remember that he gets good commission and may not be advising you as per your needs or product suitability.
For most of you, it’s better to stick with Goal-based Investing and take the route of Mutual Fund investing.
Now don’t ask me if PMS is better than mutual funds or which is mutual funds or PMS? You already know what I think after having read till here.
Note – This is a guest post by Ajay. He has previously written on this topic here. Since a few years had passed, he was kind enough to share his views again (with a useful real-life example). Ajay has also authored other interest posts here like How He created a corpus of Rs 3.7 Crore in just 10 years. So over to Ajay for this post…
Are mutual funds better than real estate for investing in India?
Can investing in real estate be better than investing in equity funds?
Mutual Funds Vs Real Estate – which is better
And similar versions asking the same things…
So let me try and address this again…
I once again reiterate that there will be many reasons for investing (or let’s say putting money) in real estate – such as peer pressure, family pressure, social status etc. and I am not debating the same. This question of whether you should invest in Real Estate (for investment) or Mutual Funds, can only be answered by you and you alone.
And therefore, this article should ideally be read in that spirit.
The intention of this post is to present facts based on the actual data, from both real estate and mutual funds from an investor’s perspective and ofcourse, my opinion on the same. 🙂
Also, as stated in the earlier post:
A home is a place to live and it should not be linked to one’s investment strategy. There should not be any second thought about buying your 1st property for self-occupancy whether with or without tax benefits.
I am aware and acknowledge the fact that being Equity and Equity Funds oriented investor, my views will tend to be biased towards Equity investments than Real Estate investments.
The experience and the actual investment returns of Real Estate investors vary from location to location. And therefore, many of you may not agree with the conclusion or findings of this post. Nevertheless, through this article, I have analyzed the actual data from the Real estate and mutual fund investments in India.
So let’s go ahead…
Real Estate Investment
In August-2010, a friend of mine decided to buy a 1200 Square feet (Sq.ft). Flat in the outskirts of Bangalore (@ Rs 2290 per Sq.ft.) through a housing loan. The details are as follows:
Cost of Flat (including Car parking, Utilities, Legal costs, Deposits etc.): Rs 31,39,500
VAT, Registration & Stamp paper: Rs 3,02,566
Total Cost of Flat (all Inclusive): Rs 34,42,066
To fund this purchase, he used:
His own money (Rs 12,42,066) and
Took a home loan for Rs 22,00,000 from a bank.
The loan EMI was Rs.21,343.
As like many of you committed individuals, he paid all the loan EMI on or before the due dates, and also increased the EMI amounts as his salary increased during the loan tenure. He also made part payments many times to accelerate the loan closure and to settle the loan as early as possible. He also put this house on monthly rental as he had to live in another city for professional reasons.
Now let’s look at the numbers below (if you are interested in the actual loan cashflow data):
Now the loan ended recently (in May-2019).
So I sat with my friend and re-calculated the actual cost of his flat:
Total Cost (Flat in Hand) – Rs 34.4 lac
Downpayment – Rs 12.42 lac
Loan – Rs 22.00 lac
Total EMI Paid – Rs 25.73 lac
Total Initial Downpayment & Prepayments – Rs 18.67 lac
Actual Cost of Flat (excl. rent)- Rs 44.40 lac
Rent Received – Rs 11.36 lac
Net Amount Paid for Flat – Rs 33.04 lac
These are real numbers. Real actual numbers.
Let’s move further.
With the loan completed in almost 9 years time, and with the general assumption of property appreciation, we expected the property to fetch at least double the investment (value) of net amount paid for the flat.
So we expected Rs 66 lac from the sale of the property.
However, we did not find a single buyer even at Rs 55 lac!!
From the local brokers and available market information, we got to know that the property could be sold immediately for Rs 40 to 42 lac and if we were lucky, it can be sold for a stretched value of Rs 45-48 lac (let’s say max Rs 50 lac). Also, there will be capital gains tax on the profit amount.
While it is concerning that there was no value appreciation despite the area is connected and having all the basic amenities in the near vicinity, I decided to take this as a case study to see an alternative scenario – where investments had been made in Mutual Funds. I wanted to know what would have been the outcome.
Mutual Fund Investment
I chose 3 funds to feed the investment data in MF (same amount invested as EMI, downpayment and prepayment on the same date as the loan payments were made).
The choice of funds were as follows:
1 decent performing fund (Franklin India Equity),
1 market performer (UTI Nifty 50 Index Fund), and
1 worst performing fund (LIC Multi-Cap Fund)
Since the direct plans weren’t available in 2010, regular plan (i.e. ones with higher fee and lower returns) were chosen for data crunching. So here are the details below (or you can skip and go straight to the summary just after the table):
Summary of the above investment table is as follows:
From the table above, it is clearly evident that if instead of buying the flat, the investment was rather made in the worst performing mutual fund, it would still have given returns of Rs 55.5 lac against Rs 40-48 lac current market value of the flat.
Investment in the index fund would have fetched a much better Rs 67.94 lac. And if you luckily had invested in a very good fund, then it would have given you about Rs 78+ lac.
Not bad. Right?
I know what many of you might be thinking…
While we can debate the time of entry in mutual funds, time of entry or locality or high cost paid for the property etc., I still find merit in investing in Mutual Funds instead of Real Estate flats as an investment. And I very well know that irrespective of the above data favouring MFs, many will still argue in favour of the real estate. I leave the decision to you.
An important point that shouldn’t be missed in this Mutual fund vs real estate debate is the importance of selecting a good fund (or avoiding bad ones) for investment. And if we stretch this topic a little, it opens up another separate debate on the Active versus Passive Funds which I guess is best left for another post.
Note: In the calculation of Real Estate, the cost for Home Insurance, Home Maintenance, etc. was not included. Also, the Rs 2 Lac tax savings during this tenure was not considered as there will be a capital gain tax on property investment too. Equity investment until March-2018 were are tax-free and therefore, the tax implication would be negligible in case of equity investment in the above case study’s tenure.
As stated in the previous post on the debate of real estate vs mutual funds, I once again have the same concluding thoughts.
And this is a repetition of the earlier statement. One should not give any second thought about buying the 1st house/property for self-occupancy, whether it is with or without tax benefits.
However, based on the comparative analysis done above, one should think twice (or even ten times…) before buying a home for investment purpose. One should carefully weigh all the available data (Or as much reliable information you have) and then take a wise call.
Just because your friend or family members are investing in real estate does not mean that you should also do it.
Diversification aspect should also be looked at. But you should not avoid evaluating your own financial goals. This is extremely critical. And don’t just evaluate and feel helpless about it. Find out how you can plan to achieve them and then decide whether you actually need (or want) to ‘invest’ in real estate or not. Different people will get different answers.
Without doubt, a physical asset (like a house) will always give huge mental comfort and satisfaction over other financial assets like mutual funds. But it is also true that it may not always be the best available investment option. In fact, investing in house funded through a loan, is a huge long-term liability – which in many cases, chokes the person’s ability to save and invest for other goals in right instruments.
In my opinion (and it is mine so you can choose to ignore it), after the purchase of the 1st property for self-use, if there is any surplus cash left to invest, you should invest it as per your asset allocation (which includes debt, equity, gold & real estate). If the asset allocation permits you to invest in real estate, you may very well do it. But if it doesn’t, then you should refrain from investing in it just because it’s what everyone else around you is doing.
As stated at the beginning of this article too, this is one hell of a controversial debate.
And there is no one straight-forward or logical answer to it. There are no thumb rules either. You and you alone can answer the question of Real Estate Vs Mutual Funds.
In this article (and in the earlier one), all I have tried is to attempt to clear the myth that “Real estate investing is the only best Investment Option” available for everyone. As you might have noticed (if you have spent some time reading the tables above), that all calculations have been done by estimating the returns net of expenses. We just cannot ignore expenses like those many who just tell you the number of times their property has appreciated in value. It’s not correct.
Hope you found this analysis interesting and useful.
Is it better to invest lump sum or
monthly SIP in mutual funds?
A lot of people ask me such questions – whether SIP (Systematic Investment Plan) is better than lump sum investing in mutual funds in India? Or whether lumpsum investing is better than mutual fund SIP?
Why I don’t
like these questions (are SIPs better
than lumpsum investments?) is because as usual, there is no one right
shades of grey and it isn’t exactly an ideal comparison.
to simply compare SIP vs one time investment in mutual funds or just want to find
out which are top mutual funds for SIP in 2019 or best mutual funds for lump
sum investment in 2019 and what not. But there are no perfect answers or ready
lists that predict anything.
look at it from a common-sense perspective.
getting into lump sum vs monthly investment debate, the decision to invest in
lump sum or SIP depends on whether one actually has enough investible surplus
that can be called as lumpsum!
If one doesn’t
even have this ‘lump sum’ then this question of SIP or lump sum in itself is
meaningless. It’s only when this ‘lumpsum’ is actually available that the
question holds any relevance.
the lump sum is there, the next question should be whether investing in one go
is better or whether it’s wiser to spread that lump sum over a short period of
time, as there can be several best ways to invest a large sum of money in
mutual funds. Just because the lump sum is available doesn’t mean that the
money should be invested in one go. There are can various other tactics to
deploy it more efficiently.
But nevertheless, there are those who prefer SIP (and have SIP success stories to tell) and there are those who prefer lump sum investing.
And to be
honest, both methods work in different set of circumstances.
to do this comparison as objectively as possible.
SIP vs Lumpsum in Rising
In a rising
market, your lumpsum investments in mutual funds will produce higher returns
than SIPs. That’s because the cost of purchase in a lumpsum investment in a
rising market would always be lower than the average cost of purchase in SIP, which
is spread out across higher and higher purchase prices for each SIP
Let’s take a
very simple hypothetical example to show this.
Suppose one investor invests Rs 5000 per month in a rising market for 12 months. While the other invests Rs 60,000 as lumpsum at the start itself. Both invest in mutual funds a total of Rs 60,000. Here is how it pans out over the next 12 months:
As can be
seen above, the average cost (average NAV) for the SIP investor in a rising
market is higher. And hence, the future hypothetical profit when sold later,
will be lower for the SIP than that of the lumpsum investor.
look at a falling market scenario.
SIP vs Lumpsum in Falling
falling market, the SIP investing would result in comparatively lower losses
than that in lump sum. And that is because the cost of purchase in a lumpsum
investment in a falling market would always be higher than the average cost of
purchase in SIP.
Here is how
As can be
seen, the average cost for the SIP investor in a falling market is lower. And
hence, the future hypothetical profit when sold later, will be higher for the SIP
investor than it is for the lumpsum investor.
basically what is happening is that if the market grows continuously, then lump
sum investing gives higher returns whereas if it falls continuously, then SIP
investing is better (lesser losses than that of lumpsum investing in such
Ofcourse in practice, the markets neither go up nor go down continuously for very long. So the actual reality may be somewhere in between the two above discussed scenarios of sip vs one time investment in mutual funds.
In some cases, SIP may give better
returns than lumpsum investing. While in other cases, lumpsum will give better
return than SIP investing. And in many other cases, the result of both will be
It all depends on the future sequence of returns that the investor gets. If you want to know how much wealth your SIP will create, try using this SIP maturity value calculator.
But let me
circle back to the original point I made – whether
you invest lumpsum or otherwise first depends on whether you have a lumpsum or
And if you
have, then obviously it would be wiser to just invest lumpsum when the market
is low. Remember Buy-low-sell-high?
is that you will never know when the market is really low. You can be wrong
about your assessment and enter at precisely wrong times.
said, what about our ‘real’ nature and how we behave?
investors are unable to use common sense when their portfolios are down.
few people have the guts to go out and invest more money (assuming they have
more). Fear plays a major role in investing and unfortunately, you can neither back-test
emotions nor fear. And you will only know in hindsight whether is it best time
to invest in mutual funds or not.
investing lumpsum in December 2007 when markets were peaking and then
helplessly witnessing the fall down till March 2009. On the other hand, if you
invested a lump sum in March 2009 instead (at the bottom), you would have been called
the next Warren Buffett!
extreme examples but show how lumpsum investors potentially expose their portfolios
to the vagaries of the market. There is always the risk of being completely
wrong and mistiming. And that is the problem. To be fair, one can also get the
timing right and if willing to spend sleepless nights in the short term, can go
on to make much higher returns than usual in medium to longer term. But that’s
how the dynamics of lumpsum investments are.
Due to their
structural nature, SIPs reduce this risk of being completely wrong as the
investments are spread out. So asking whether is this the right time to invest
in SIP is immaterial as SIP spreads out your investments. Ofcourse your returns
will depend on how the markets play out during the spreading-out period. But
that is how it is.
investors, SIP is also suitable from their cashflow perspective. They rarely have
access to large lumpsum that is ‘surplus enough’ to be available for long term
One can use the SIP investing to slowly build up a large corpus over the years without straining the finances in present or worrying about timing the markets perfectly. You can try to use this sort of yearly SIP calculator to understand how much money you need to save for various financial goals.
I know that
many of you are more focused on saving taxes.
And one popular way to save taxes these days is to go for best tax saving ELSS funds vs PPF. But there also, people tend to get confused whether to go for SIP or lump sum for ELSS when investing in top ELSS mutual funds. Nevertheless, the logic that we have been discussing till now remains the same irrespective of whether it’s an ELSS fund or a normal mutual fund.
Now let’s take
a step further…
What if you
have a lump sum that can be invested. Should you go ahead and invest it in one
go or do something else?
Should you Invest Lump Sum
In One Shot Or Systematically & Gradually?
investor would recognize the market bottoming out and invest in one go. But we
all aren’t smart. So if you aren’t sure if it’s the right time to invest in one
go, you can even deploy your lump sum gradually.
There is no
one single answer to which is the best
method to invest a lump sum in mutual funds?
depending on the market conditions, investor’s investment horizon and risk (and
volatility) appetite, a deployment strategy may have to be worked out. This
strategy may either aim for lowering risk or maximizing returns or a
combination of the two.
One way is
to put lump sum investment in debt mutual fund and gradually deploy the money using
STP or Systematic Transfer Plan into an equity fund.
investor needs would demand different lumpsum deployment strategies.
Being a small investor, it can be daunting to find out which are the best SIP plans that can be considered for long term investments. Or for that matter to find out which are the best mutual funds for lumpsum investment or the best tax saving mutual funds in India or whether to do ELSS SIP or lump sum.
If you don’t know how to find good funds or need help with planning your investments, do get in touch with a capable advisor to help you. It is worth it.
I am sorry
if you did not find the one specific answer to your question of SIP
or Lumpsum which is better for investing.
comparison between SIP and lumpsum investing is neither fair nor accurately
possible. And unless we know everything about the investor in question, one
cannot say confidently which is better suited for whom.
You may feel that there is a secret to find the best time to invest in mutual funds India but there is no secret. Different investors need to follow different investment strategies for SIP and lump sum investing. And ofcourse an awareness of market conditions and how market history plays out is absolutely necessary. You can’t be blind to that.
and done, SIP is a comparatively safer option but we cannot deny that at times,
lump sum investing will provide better returns if done correctly.
Which is better SIP or lump sum investment in top best mutual funds in 2019?
sound repetitive but the truth is the superiority of SIP over lump sum or of
lumpsum investments over SIP varies under different conditions.
Is SIP better
than one time investment? Or lump sum is better than SIP? Systematic Investment
Plan vs Lump sum Investment? It is all a matter of probability and what is the sequence
of returns that comes in future and how investor behaves during the period in
consideration. That’s all there is to it.
This is a common question that I am asked quite often, more
so during the tax saving season.
Choosing between the ever so popular Public Provident Fund (PPF) and Equity-linked Saving Schemes (ELSS).
To be fair, comparing one to the other isn’t exactly
correct. But I will get to that in a bit.
If you think about it, the main motive behind such PPF vs ELSS questions is fairly obvious – the more tax you pay, the less money remains in your hands. So you will naturally try to find ways to save more taxes. And if these tax saving efforts can help you earn good returns, then nothing like it. Isn’t it?
Unfortunately, people want a clear-cut, crisp,
one-word answer to such ELSS vs PPF questions.
But that’s easier said than done. Things aren’t
always black and white. There are hundreds of shades of greys in between.
Another question derived from the earlier one is whether doing SIP in ELSS funds is better
than investing in PPF every month?
Those who are risk averse obviously feel PPF is a better savings option. While those who have got good returns from ELSS funds in the past (or know that equity is the best asset to create long-term wealth) advocate going for SIP in ELSS funds.
And here is an interesting fact: the number of such PPF vs tax saving ELSS debates
rises during the tax saving season. JPeople are in a mad rush to do some glamorous,
last-minute tax savings and portray themselves as financial superheroes!
But last-minute tax saving efforts near the end of the
financial year is a recipe for disaster.
But let’s not digress and instead focus on the main questions
Is ELSS mutual fund better tax-saving investment option than PPF (Public Provident Fund)? Or
Is PPF better tax-saving option than ELSS funds (Equity Linked Saving Schemes)?
No doubt both are very popular.
And when you ask people about the best tax saving
investment options, chances are high that you will get either ELSS or PPF as
But as I said earlier, there is no perfect or one clearly
defined right or wrong answer to this debate.
Ofcourse if you pick just one of the several parameters,
you are bound to find one clear winner. But that is not the right approach.
But let’s begin the comparison anyway…
Most people prefer to compare returns.
Unfortunately, that is neither wise nor a fair
as a product is extremely safe and gives assured returns whereas returns
from ELSS depend on the performance of the stock markets. So the returns of
ELSS can be very high or very low and fluctuate somewhere in between.
Both are completely different products and target
different needs of a portfolio. So we shouldn’t even be comparing them!
But people do and will continue to compare.
And one very big reason why people compare them is that both have a good and instant side-effect of providing tax-saving… that too under the same Section 80C of the Income Tax Act. Hence people tend to compare.
I know what you are thinking.
Firstly, we are concerned about tax-saving. Right? That’s
common between ELSS and PPF. So nothing much to compare.
Next obvious choice is to compare returns. What else
could it have been?
Your goals and investment horizon play a major role
in defining how you invest. If investing for long-term goals, the investment
portfolio should ideally have a larger equity component. Whereas when saving
for short-term goals, it should be a less volatile and debt-heavy portfolio. The
asset allocation differs for different financial goals. That’s how it should
I will not delve into the full details of what PPF
is or what tax-saving ELSS funds are. I am sure you already know most things
about them. But just to recap a bit:
PPF (or Public Provident Fund) is a government-backed debt product that assures returns that are declared from time to time. How much to invest in PPF to save tax? A maximum of Rs 1.5 lakh can be invested in lump sum or installments in one financial year. The lock-in period is 15 years and the account can be extended in blocks of 5 years multiple times after the original 15-year maturity period is over. Tax benefits for investment in PPF under Section 80C are limited to upto Rs 1.5 lakh.
ELSS (or Equity Linked Savings Scheme) is a diversified mutual fund that invests in stocks and also offers benefits under Section 80C. There is no limit on maximum investment but tax benefit is available only on Rs 1.5 lakh. The lock-in period is 3 years. Returns are neither guaranteed nor assured. They are market linked and (average returns) tend to beat inflation in the long term.
Comparison of Returns – ELSS vs PPF
As I have already said, comparing returns of PPF
with ELSS isn’t 100% correct.
Both have very different investment objectives.
PPF is a debt product whose returns are fixed but
limited due to its very nature. There is no potential for positive or negative
surprises. You get what you are promised by the authorities. ELSS, on the other
hand, is an equity product that aims to maximize returns. To achieve this aim,
it takes risks which can turn out well at times and not turn out well at other
To give you some idea about how returns in ELSS
funds and PPF differ every year, I have tabulated the annual returns of some of
the popular tax-saving ELSS mutual funds in the table below:
The data has been sourced from Value Research. This is not a perfect comparison but is still good
enough to give you a comparative snapshot. You can compare the year-wise
returns and average category-return of these ELSS funds with PPF annual
interest rates. This table will give you some idea about how the returns vary
in reality, so I suggest you spend some time on it.
And the funds above are one of the best ELSS funds
that have been in existence for last several years now. But do not think of
this as an advice of best-ELSS-funds-to-invest kind of list. The data is just
for illustration purposes.
But nevertheless, read the observations below:
PPF returns have mostly ranged from 8.0% to 8.7% in the recent past. To know more about PPF account interest rate in different banks, check the updated latest PPF interest rates.
The years with green colored PPF-return grids indicate that the PPF was the better performing when compared with other ELSS funds in that year. Like in 2008, PPF delivered 8% whereas the chosen set of ELSS funds gave average returns of -54% with individual funds delivering anything between -48% to -63%. Similarly in 2011, PPF did better than ELSS schemes.
The years with red PPF return grids show that ELSS gave higher returns than PPF in those years. For example: in 2017, ELSS returns ranged from 26% to 46%. Obviously PPF couldn’t match that with its 8%.
The smaller grids (max/min) show the maximum and minimum annual return for different ELSS funds for that given year.
It’s clear from above that depending on the market conditions,
the ELSS returns can have wild fluctuations. PPF returns on the other hand are
more or less constant due to government’s blessings.
So where PPF returns average around 8%, tax saving
ELSS mutual funds have the potential to deliver a much superior return – a 12%
to 15% average returns is possible, but not guaranteed. And the top best ELSS
funds have given much better returns than these average returns.
So does it mean that you should simply dump PPF and
start investing everything in ELSS funds?
Ofcourse not! The average return comparison of ELSS and PPF does seem to show that ELSS offers superior returns in the long run. But basing your investment decisions only on one factor is very risky. Here’s why.
Let’s check another aspect before we get judgmental.
I have simulated Rs 10,000 monthly investment in Franklin India Tax Shield Fund* starting
from January 2008 to December 2018. This is to be compared with Rs 10,000 per
month savings in PPF for the same period.
from several ELSS funds. Don’t consider it as a recommendation.
The value of investment in Franklin’s ELSS fund at the end of 2018 would be about Rs 29-30
lakhs. On the other hand, the value of PPF corpus is 20-21 lakh.
Once again and maybe not surprisingly, it seems ELSS
is the way to go.
You can also say that in the above case, the
PPF-investor has actually lost out on more than 50% extra returns. (Rs 30 lakh
– Rs 20 lakh)
I have compared Rs 10,000 monthly SIP in Franklin Tax Shield vs monthly 10,000
savings in PPF starting from April 2007 (when the bull run was about to peak in
I chose that starting point because due to high
returns from equity in recent past (2004-early-2007), many people would be
attracted to stock markets and would be interested in ELSS – as it combined tax
savings with much higher returns than PPF.
So here is a 2-year story – starting from April 2007
to March 2009:
In 2 years, the total contribution would have been
Rs 2.4 lac in each.
And the value of ELSS investment would be Rs 1.6 lac
and that of PPF would have been about Rs 2.6 lac (yellow cells in the bottom
We know equity will do well in long term. That is
what has been told and proven countless times
But how many people would remain convinced and loyal
to that idea when their Rs 2.4 lakh investment goes down to Rs 1.6 lakh after 2
They might be cursing themselves for ignoring PPF
that would have saved them from such losses.
And this is what I wanted to highlight.
And no PPF vs ELSS calculator or SIP vs PPF
calculator will tell you this. All such ELSS SIP investment calculators work on
the principle of average returns which will not show the real picture.
Just looking at historical average returns, you might feel that investing 100% of the money in stock markets is the right way. But when markets correct, not many people have the ability to stay invested and accept the temporary losses, even though it is best for them.
Looking at the average long-term returns in
isolation can give the wrong picture. Equity investing (directly or via mutual
funds) does need a lot of will power to remain invested when markets are down.
Not many people have it.
So is it better to
invest in ELSS mutual funds SIP than in PPF?
It is true that
investors of ELSS mutual funds are rewarded for accepting the short-term
volatility. They are paid back handsomely as average return table above suggests.
But when you invest in markets, you will face periods of stock market
volatility every now and then. Like in 2008, the ELSS category fell by almost
50%. Again in 2011, the category average was about -24%.
Equity is perfectly fine for long-term investors and
equity funds have given much better returns than PPF over long-term. But you
just cannot ignore debt (like PPF) as the investors have different responses to
volatility. Some might exit ELSS after 20-30% losses (which is normal in
Another factor is that you don’t have to ‘choose’
anything in PPF. It’s simple.
But in ELSS funds, you have to choose the fund among
many available ones. Is there any guarantee that you will be able to choose the
right ELSS fund that will do well in future? Think about it. What if you picked
the wrong funds?
That was about the
comparison of investment returns of PPF vs ELSS mutual funds.
Let’s see other
Tax Benefits on investments in ELSS Vs PPF
Both ELSS and PPF
are quite tax efficient.
Under the Income Tax
Act Section 80C, investment in ELSS mutual funds and PPF (Public Provident
Fund) give you a full tax deduction upto Rs 1.5 lakh every financial year.
Under Section 80C, you cannot claim deduction of more than Rs 1.5 lac when investing in ELSS or/and PPF and/or other section-80 tax saving options.
Also, you cannot
invest more than Rs 1.5 lakh in a PPF account in a year. But this restriction is
not there in ELSS schemes. You can invest as much as you want, but the tax
benefits available will be limited to Rs 1.5 lakh.
And let me answer
two more questions that you might have:
A PPF account has a
maturity period (lock-in) of 15 years. ELSS funds on the other hand have a lock
in period of only 3 years. But wait. There is more to know than just that…
Assuming you make
annual investments in PPF, only your first installment in locked-in for 15
years. The 2nd year installment is locked-in for 14 years. The 3rd year
installment is locked-in for 13 years…and so on. Also, the PPF accounts that
have completed 15-year lock-in and have been extended have a fresh lock-in of
In ELSS, each SIP
installment has its own 3-year lock-in. many people get confused here. Do not
think that lock in is valid on full amount that you have invested from the date
of first investment in ELSS.
So first SIP in
April 2017 will be locked in till April 2020. Second SIP in May 2017 will be
locked-in till May 2020. And so on…
But let me remind
you that equity is best suited for long-term. Like for periods exceeding 5
years. The money is locked for only 3 years in an ELSS fund. But even if the
lock-in gets over after 3 years, you shouldn’t withdraw the funds and remain
invested for as long as you don’t need the money.
As investors you need to be very clear that the asset that you are investing in is equity and thus you should be ready to stay invested for at least 5 to 7 years to get good returns.
What if you Invest 100% in PPF or 100% in ELSS?
These type of questions come from people who are unwilling to see the
bigger picture and are only narrowly focusing and asking about PPF vs mutual
funds which is better?
Regular SIP in equity funds (both ELSS and non-ELSS) can create a lot of wealth in long run. Here is a good real-life success story of SIP-based Wealth Creation. To know how much wealth you can possibly create by investing small amounts every month, check out the following links:
And if you think
like that, then you will easily get answers to questions like ‘how much should I invest in ELSS’ and ‘how much should I invest in PPF’?
But you don’t need
to decide between PPF and ELSS because of just returns.
You instead simply need
to focus on asset allocation (which is 70-30 in the above example). Therefore,
the choice between doing SIP in ELSS funds and investing in PPF must also be
seen in the context of overall portfolio asset allocation.
If there is room
under the 30% debt bucket after deducting EPF contributions, you use PPF. For
equity’s 70% bucket, you can use ELSS to the extent it is needed for tax
But that doesn’t mean that you don’t invest for your goals. Tax-saving
is not a financial goal. Just remember that.
The approach that I discussed above is in line with goal-based
One simpler approach can be to take a middle path and do a 50-50 split
between PPF and ELSS.
Another can be (for those who are interested in being more tactical
about tax-saving) to use market valuations as an indicator to decide where to
invest. If valuations are low, invest in ELSS. If valuations are very high,
invest in PPF.
I am not suggesting that the tactical approach discussed above is a better way. Just highlighting that there can be multiple approaches. But most people are better off not trying to time the markets. 🙂
But the actual split between ELSS and PPF will depend on factors like
your risk profile, existing assets, etc.
Just to reiterate, if you are young, keep a larger portion of your savings directed towards equity when investing for long term goals like retirement.
Both ELSS and PPF are suitable for retirement savings. But equity is
better suited as long as you have several years left for the goal.
How to choose good Tax-Saving ELSS Mutual Funds?
Before even you consider ELSS as the choice for tax saving, do not
forget that always invest in ELSS with a long-term perspective – something like
5+ years or even more.
Because ELSS is about equity investing. And equity as an asset class
isn’t risk free. There is always a risk of loss of capital. But this risk is
higher when you invest for short term. The longer your investment horizon, the
lower is the risk of loss.
With that aside, how do we go about picking the best ELSS funds among
all ELSS mutual fund schemes out there?
These days, the disclaimers about past performance not being
necessarily sustained in the future fall on deaf ears.
So despite mutual fund companies highlighting great short term returns,
you should focus on things that matter.
When looking for which ELSS funds to invest in for tax saving, keep the
below discussed points in mind.
Depending solely on performance numbers from recent past can be misleading. Do not run after previous year’s best performing tax saving ELSS funds. Look for consistency in returns over several years. Has the fund been in the top quartile of its category for almost all the years? Has the fund protected the fall in poor markets? These are just some of the questions that should come to your mind when picking ELSS or building a proper mutual fund portfolio. You can even consult an investment advisor to find out these answers.
Also, all ELSS funds are not the same in terms of portfolio
All ELSS funds are actively managed and its fund manager’s job to
decide what to hold in fund’s portfolio. It can a portfolio with a bias towards
large cap, midcaps, all caps or whatever.
What is worth remembering is that one ELSS fund’s investment mandate
will not be the same as that of the ELSSs out there.
And there is absolutely no need to pick a new ELSS fund every year for your
This often happens when you do last minute tax saving. You are in a hurry and want to find out the best performing ELSS fund on the basis of 1-year return. This is not advisable.
Over the years, investors end up with several ELSS schemes as they
invest lump sums every year by picking one from the best performer of previous
years. Like picking from Top ELSS Funds of 2018 or Top ELSS Funds of 2019.
But having more than 1 or 2 ELSS funds is useless. In any case, if you have other non-tax saving diversified mutual funds, having more ELSS funds will only lead to an overlap in your portfolio. Building a mutual fund portfolio isn’t tough but still people mess it up.
So don’t wait for January, February or March for planning your tax
Do some homework earlier and find out how much is to be invested in ELSS in the year. And then begin investing in ELSS through SIP (systematic investment plans). This way, you would have time to pick good ELSS funds on the basis of long-term consistent performance. You will also benefit from averaging (and avoid timing the market through last minute lump sum investments).
We began this article with the question of whether to invest in PPF
or ELSS to save taxes.
You should not decide randomly between ELSS or PPF. And there is no
one-size-fits-all answer as both ELSS and PPF target different needs of the
The decision should be made after you have a clear view of your financial
goals and tax requirement.
But when it comes to combining equity investing with tax saving, there
is no doubt that ELSS is good for long term investments. It scores well
above several other tax saving products. And investing in ELSS through SIP (or
systematic investment plans) over a long time horizon can help you do proper
tax planning and financial goal planning.
If you have a well-thought out investment plan for your financial goals, you will not need to ask questions like which is a better investment option ELSS or PPF?
You don’t need to choose between the most suitable tax saver between ELSS vs PPF. That is because you will invest on basis of your goal-specific strategic allocation rather than randomly. And that is what goes a long way in sensible investment management and wealth creation. So taking sides on ELSS vs PPF is fine. But invest smartly and using correct goal-based approach.
If you are a mutual fund SIP investor, you would already have been bombarded with thousands of articles about why mutual funds and more particularly mutual fund SIPs are great.
And that is true.
But I wanted to re-highlight this fact in a different light.
SIP is not perfect like the theoretical (but attractive) concept of Buying-Low-Selling-High. But still, it works best for small investors and is their best bet when it comes to equity investing.
I recently wrote an article for MoneyControl on this topic. If you wish to understand why SIP isn’t Perfect but still the small investor’s best bet, then please do read the article by clicking the link below:
I am planning to regularly track AMC level AUM data going forward. So hopefully, with each iteration, the information and details will increase.
Please do note that the AUM figures are average quarterly figures published by AMFI.
The table below shows AMC-wise average AUM during Jul-Sep 2018 quarter. It also compares these figures over the previous quarter (Mar-Jun 2018) and also with the same-quarter-previous-year (Jul-Sep 2017):
Talking of the Top-3, the ICICI Prudential MF continued to lead with an AUM of Rs 3.10 lakh Cr followed by HDFC MF with Rs 3.06 lakh Cr and Aditya Birla Sun Life MF with Rs 2.54 lakh Cr. SBI MF with Rs 2.53 lakh Cr elevated itself to the 4th spot by replacing Reliance MF with Rs 2.40 lakh Cr.
These top 5 AMCs handle about 56.3% of the AUM.
And as expected, more than 95% of the industry AUM is handled by the top 20 AMCs:
Here is the list of all the active AMCs in Indian MF space:
ICICI Prudential Asset Mgmt. Company Limited
HDFC Asset Management Company Limited
Aditya Birla Sun Life Asset Management Company Limited
SBI Funds Management Private Limited
Reliance Nippon Life Asset Management Limited
UTI Asset Management Company Ltd.
Kotak Mahindra Asset Management Company Limited
Franklin Templeton Asset Management (India) Private Ltd.
DSP Investment Managers Private Limited
Axis Asset Management Company Ltd.
L&T Investment Management Limited
IDFC Asset Management Company Limited
Tata Asset Management Limited
Sundaram Asset Management Company Limited
Invesco Asset Management (India) Private Limited
DHFL Pramerica Asset Managers Private Limited
Mirae Asset Global Investments (India) Pvt. Ltd.
LIC Mutual Fund Asset Management Limited
Motilal Oswal Asset Management Company Limited
Edelweiss Asset Management Limited
Canara Robeco Asset Management Company Limited
Baroda Pioneer Asset Management Company Limited
JM Financial Asset Management Limited
HSBC Asset Management (India) Private Ltd.
IDBI Asset Management Ltd.
BNP Paribas Asset Management India Private Limited