Products never speak for themselves otherwise, Maggie would have been first one to speak and claim innocence (or accept what humans did to her). But this is an attempt to learn, evaluate and find the best out of the two products. So if PPF and ELSS were to speak for themselves and met on my website for a stroll, here is the conversation what they will speak to each other.
It’s not a presidential debate- so no moderator. I will keep shut after I introduce the speakers.
PPF: PPF or the Public Provident Fund is like the father-figure introduced in India in 1968 as a small saving scheme. Before MFs came, LIC and PPF were the 2 main instrument for Tax Saving in India. Even in the last few years, when Insurance has lost its charm, PPF continues to be in recommendation list of Financial Planners under Debt Category investments. The government gives no Brokerage on PPF investments to Agents/middleman but PPF continues to grow.
ELSS: Equity Linked Savings Scheme is kind of Mutual Funds, which qualify for Sec 80C same as PPF. They were born with the MFs but came into prominence when markets gave huge returns in equity category during 2003 to 2007. Initial push came from the equity performance and then MFs and their agents sold it for higher commissions. They are known to give 3-5% commissions then the normal equity fund as there is lock-in of 3 years and Fund House and agents are sure the money will not move. But as a product, they have unique features and especially young investors invest in them.
*So here is the conversations between PPF and ELSS*
PPF: I am more resourceful than you.
ELSS: Age wise may be yes. But why do you think so?
PPF: 1. I hold my investors for 15 yrs. They can’t leave me before that.
2. Once they choose me, they have to contribute something every year. I make wealth for them.
3. They can look on to me if they are in urgent need of money.
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4. I give guaranteed return. I am not volatile like you.
5. I have government backing. Ministry of Finance in my incubator.
ELSS: I may not be powerful like you in few things like Government backing or guaranteed returns. Although I am highly regulated. Ministry of Finance works closely with my regulators SEBI & RBI. Also, I am a product which will not have guaranteed returns as I work on daily valuation. Hence I cannot guarantee returns as I don’t know how much I will generate. But I am helpful to my investors.
1. I don’t want to forcefully hold them. If they are not comfortable with me, they can leave after 3 yrs.
2. I don’t ask them for mandatory contribution and I don’t deactivate them.
3. I offer a great flexibility as they can touch me anytime after 3 yrs. They can choose to add on any amount in any year.
4. Your returns are also volatile which changes every year. I know I am volatile but I provide them a tool (SIP) to get benefit from my volatility and I help them to beat inflation to create wealth.
5. Of course, you have a backing of government but even government too may not able to maintain your attractiveness in the falling interest regime. That is why you are at 8.1% now from 12%.
PPF: So you accept you are a risky product? You invest in shares and hence call yourself volatile.
ELSS: Yes, I am invested in equities, and that is the reason I am invested for fairly long time. You also know, if horizons are long, no one has lost money in equities. I believe in that 3 years lock-in does not mean I am a product to invest for 3 years only.
PPF: Hey this is annoying on your part, my 15 years maturity is considered stringent whereas your 3 years is considered flexibility?
ELSS: Your anger is justified buddy, but it’s how we are sold by the middleman. Thank God you got rid of them. See wealth creation is a process of “Buying Right Assets, and Sitting Tight for Long”. So if a person holds both of us, he will make money- tax-free money.
PPF: But I have some serious questions to you. I am a pure Debt product and you are a hard-core Equity thing. What should a tax saver prefer?
ELSS: Features of the product should be the last criteria to decide. An investor looking for making investment in Tax Savings product should follow these things:
- He should get his risk-tolerance calculated as this will determine his asset allocation. To simply put he will know how much equity and how much debt he should invest.
- He should aim to buy products which beat inflation and give tax efficient returns.
- He should by strictly in accordance with his asset allocation.
- He should look to stay long until and unless funds are required for some useful purpose.
PPF: I think that’s very good summation.
ELSS: Yes my friend and now you know that you are preferred by Financial Planner because you provide tax-free returns way above inflation in Debt Category investments, and not because you are Government backed or a historical product.
PPF: You mentioned Agents/Middleman… How do they sabotage us?
ELSS: I will give you an example. One of the agents messaged following text to his investors:
*If anyone invested Rs. 1,00,000 Every Year. since 29th March 1996 in both above mention instruments Total investment would be 21,00,000*
*Valuation as on 31 Aug 2016*
*ELSS = XXXX TAX SAVING FUND= 4,13,26,784*
*PPF= 2.62 Times*
*ELSS = XXXX TAX SAVING FUND = 19.67 Times* of Investment.
There is absolutely nothing wrong with the data. But the agent wants everyone to invest in Equity without bothering the asset allocation and risk tolerance of the investor. He is not concerned with the volatility that investor has to face. Just because I happen to get him his commissions. He is just showcasing performance by comparing apples to ladyfinger. ELSS is bound to give more returns than PPF as the world over Equity has outperformed Debt. Is it a rocket science?
What will happen is initially investor will undermine you as a product and then when he faces volatility he will disrespect me as a product and exit moment he is free after 3 years. Ultimately except agent, no one will make wealth.
PPF: Well said my friend, I hope the new upcoming advisors give us the right treatment.
ELSS: Yes, the process has started. The new generation advisors are talking about building portfolios using scientific methods and considering products without brokerage related biases.
PPF: I joined this conversation to prove my supremacy, but I am happy to be enlighted of my role. I now know we will coexist and make wealth for our investors.
Between you and me
Smart tip: Now NRI’S can also invest in PPF’s.
Tax Savings investments are a core part of your portfolio strategy and asset allocation. They should be strictly bought as per your portfolio goals.
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