PPF re­gains the crown with the best re­turns

2018: THE YEAR THAT SAFETY WON

Mint Asia ST - - News - BY S UNITA A BRA­HAM

Risk

shun­ners won and thumbed their noses at eq­uity in­vestors in 2018. The Pub­lic Prov­i­dent Fund (PPF), the one true friend of many mid­dle-class In­di­ans, re­gained its pole po­si­tion this year with an an­nual post-tax re­turn of 7.7%.

The Na­tional Sav­ings Cer­tifi­cate also re­turned 7.7%, but post tax, PPF turns out bet­ter

For the guar­an­teed re­turn-seek­ing in­vestor, there were sev­eral other prod­ucts that did well in this space (see chart). The top five ul­tra short­term debt funds, which in­vest in se­cu­ri­ties with ma­tu­ri­ties be­tween three months and six months, re­turned an av­er­age of 7.78%, but this was not a guar­an­teed re­turn.

It was a year when it paid to play safe. But the rea­son for high re­turns in guar­an­teed in­come prod­ucts was also one of the causes for con­flict be­tween the gov­ern­ment and the Re­serve Bank of In­dia (RBI). An­tic­i­pat­ing that in­fla­tion would quicken, RBI kept pol­icy rates high, im­pact­ing the rates on 10-year gov­ern­ment se­cu­ri­ties PPF Debt ul­tra­short NSC MIS Debt liq­uid Post of­fice three-year de­posit Gold FD (one-three . years) Post of­fice two-year de­posit Post of­fice one-year de­posit Nifty 50 Nifty Mid­cap 100 In­fla­tion rate (G-sec). That, in turn, in­flu­enced re­turns on a whole raft of prod­ucts that are bench­marked to the G-sec rate.

For ex­am­ple, the PPF rate is al­ways 25 ba­sis points higher than the 10-year G-sec rate. Other prod­ucts too ben­e­fited from the high pol­icy 2018 re­turns in % rates and with in­fla­tion at 4.74%, the real re­turn (the ex­tra re­turn over in­fla­tion) re­mained very high for fixed-in­come prod­ucts. “The RBI hiked pol­icy rates in 2018 in re­sponse to the MPC’S (mone­tary pol­icy com­mit­tee’s) stance on in­fla­tion and liq­uid­ity. Well-cap­i­tal­ized banks raised fixed de­posit rates to ac­com­mo­date the ex­pan­sion seen in credit growth,” said Ra­jiv Anand, ex­ec­u­tive di­rec­tor of Axis Bank. “As a con­se­quence of RBI’S ac­tions, real re­turns from fi­nan­cial prod­ucts whose yields are af­fected by the pol­icy rates, in­clud­ing fixed de­posits and small sav­ings schemes, rose. With in­fla­tion be­low 4%, the bias for real and nom­i­nal rates is to the down­side.”

In con­trast, it was a bad year for stock pick­ers, with mid- and small-cap shares fall­ing sharply.

The Na­tional Stock Ex­change’s Nifty in­dex gained 2.69%, gen­er­at­ing a neg­a­tive re­turn post in­fla­tion.

“In 2018, we ob­served some pay­back as volatil­ity re­turned on the back of global and do­mes­tic head­winds, par­tic­u­larly higher in­ter­est rates, jump in oil prices and large for­eign out­flows,” said Man­ish Gun­wani, chief in­vest­ment of­fi­cer, eq­uity in­vest­ment, Re­liance Nip­pon Life As­set Man­age­ment Ltd.

In­vestors who looked at last year’s win­ner in 2018 did badly. The one-year to­tal re­turn on Nifty Mid­cap 100 in­dex in 2017 was 49%, mak­ing fixed de­posits and PPF look poor in­vest­ments in com­par­i­son.

In­vestors in 2019, who look at 2018 re­turns and rush to in­vest in PPF, fixed de­posits and gold, may be mak­ing a sim­i­lar mis­take. In­stead, a well-bal­anced port­fo­lio with some in­vest­ments in safe prod­ucts and some in eq­uity would be a bet­ter choice.

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