Investments in equity-linked savings schemes (ELSS) of a mutual fund’s would yield higher returns compared to other fixed income instruments like public provident funds and national savings certificates (NSCs) over the past 15 years, if invested systematically. However, in a point-to-point comparison over the past 15 years, LIC Nomura Tax Plan, the worst performing scheme, delivered a return of just 6.91% over the period from 1 March 2000 to 30 April 2015. A PPF earned an average interest rate of around 8.50% over the same period.
But when investing in an equity scheme, it is essential to invest regularly. Had you invested systematically in the LIC Nomura scheme, the yield (IRR-internal rate of return) works out to 13.49% compared to a yield of 8.31% for the PPF. Therefore, if an investor made a single one-time investment in the mutual fund scheme, he would have underperformed a PPF. Making regular investments each year would have improved his yield.
LIC Nomura Tax Plan was the worst scheme over the 15-year period. HDFC Taxsaver was the best performing scheme with a return of 16.09% on a point-to-point basis. The CNX Nifty index delivered a return of 10.86% over the period. The average return of the 12 schemes available over the period was 13.45%.
A few percentage point difference may seem small, however, over 15 years, the power of compounding and investing systematically can lead to a huge difference in the final value. Investing Rs1 lakh each year in HDFC TaxSaver would have led to a portfolio value of nearly Rs1.14 crore at the end of the period in March 2015, a yield of around 24%. Had you invested in the LIC Nomura scheme, your portfolio value would be less than half of this at Rs47.71 lakh.
Investing in schemes of Franklin Templeton, ICICI Prudential and SBI Magnum too would have led to a corpus of over Rs1 crore.
There is no doubt that PPF is among the best long-term fixed income product, but investing in equity is the key to long term wealth generation. However, when investing in equity mutual fund schemes, one not only needs choose the right scheme but also needs to invest regularly to benefit from the volatility in the market through rupee-cost averaging.