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NISM Certifications · NISM-Series-X-B: Investment Adviser (Level 2) · Comparison of Products Across Categories

Caselet: Rahul, 35, has a 25-year horizon to retirement, a high risk tolerance and invests Rs 20,000 monthly. He is choosing between a PPF (rate 7.1% p.a., tax-free, Rs 1.5 lakh annual limit) and an equity index fund (long-term expected return 11% p.a., not guaranteed). For the portion of his monthly investment beyond the PPF limit and for long-term wealth creation, which comparison is most appropriate?

The most appropriate approach is to use PPF for its safe, tax-free core up to the Rs 1.5 lakh annual limit and put the remainder in the equity index fund, since his long horizon and high risk tolerance suit equity growth, though equity returns are never guaranteed.

  1. AUse PPF for the safe, tax-free core up to its annual limit and direct the remainder to the equity index fund for growth, given his horizon and risk toleranceCorrect
  2. BPut the entire amount in PPF because its return is guaranteed and therefore always higher over 25 years
  3. CPut the entire amount in the index fund because equity returns are guaranteed over 25 years
  4. DAvoid both because neither offers any tax benefit

Explanation

PPF is capped at Rs 1.5 lakh a year (Rs 12,500 a month), so Rs 20,000 monthly exceeds it. His long horizon and high risk tolerance support equity for the excess. PPF is safe but not guaranteed to beat equity, and equity returns are never guaranteed.

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