- September 7, 2014
- Category: Investments
Following newspaper advice can be injurious to your financial health
Investment-related newspaper articles are better taken with a pinch of salt. The recent article in The Economic Times stating PPF investment can beat Sensex returns over 20-year is one such piece that shouldn’t be taken at its face value.
The all-time highs notched by stock markets have been attracting investors. Those sitting on the fence may be just gearing up to initiate baby steps into equity investments now that the sentiments are improving.
Many may have just found the courage to act on the financial advisor’s admonishment that one should not sweat over short-term fluctuations in the stock market as equity investments reward you over the long term for being a patient investor.
But, have your views about equity which you had just resorted to for your long-term needs been shattered by the recent articles in leading newspapers.
‘PPF investments can beat Sensex over 20-year period’ – this and such other headlines screaming through the newspaper would be forcing you to rethink the decision of shifting your loyalty to equity investments from the PPF and debt investments such as fixed deposits that you were devoted to so far.
We thought it is essential for us to justify whether the arguments made in the article “PPF investments beat Sensex over a 20 year period” hold any weight and what role equity plays in your finances.
The analysis holds true, but on paper alone. Actual investor returns would be way different from what we have seen in the article. Though extensive analysis has been done while presenting the PPF vs Sensex comparison, several aspects of equity and investor behavior have been ignored.
The argument falls flat on many fronts. Firstly, the PPF interest is controlled by the government and it reigned at the 12% level during the initial eight years that the author has considered.
No one can invest in PPF only once, as investments are mandatory each year. Similarly we also hope no one invests in equity only once. Today the most common mode of investing into stock markets is through systematic investment plans in equity mutual funds, where regular sum is invested each month to even out the costs over longer periods. This kind of investments at regular intervals into both PPF and equity haven’t been taken into account in the article.
Apart from index fund investments, very few try to mirror or invest completely into the index. One buys individual stocks or invests into mutual funds that hold a portfolio of varied stocks, whose returns may vary from those generated by the handful of companies that form the Sensex index.
In fact, the same author has mentioned in another article published the same day that equity funds have beaten Sensex by a huge margin. The Sensex may have given mediocre 9.14 per cent returns since 1994, but The Franklin India Bluechip Fund, the top performer in the past 20 years, has given an annualised return of 20.17 per cent, the author writes in ET Wealth.
A lesson learnt here – we shouldn’t go by the sensational headlines alone as the devil always lies in detail.
Also, you may find other articles during different time lines throwing up contradictory results. A sister concern The Times of India wrote in 2007, If you had invested Rs 1 lakh in October 2002, your investment would have become Rs 14.63 lakh (over five years). A similar amount invested in PPF in 2002 would have become only Rs 1.47 lakh (by 2007).
This contradictory view point is a result of differing returns during varied time periods. Another lesson learnt – Data can be tortured to reach any conclusion. It is rightly said too much of analysis leads to paralysis.
Our view is that one should always compare apples to apples. Comparing a debt product with equity is a flawed way of looking through the glass.
Also, we have time and again harped on the fact that financial investments should never be skewed to purely debt or equity or real-estate. All these shades of investment in the right proportion help you weave the rainbow of contentment for a healthy financial life.
So should you be looking at PPF or equity? Well, you shouldn’t be looking at either one of them but both of them as these are designed to meet different needs and goals. Allocating appropriate sum to each, apart from other categories is quintessential.