PPF Vs Mutual Fund: Which One to Choose?
I cannot help but recall what Jane Austen once said “To wish was to hope, and to hope was to expect“.
Being a complex and powerful entity, our human mind shapes our expectations in various aspects of life, including investments. So, as an investor, we usually have certain expectations from their investments, such as safety, good returns, tax benefits, and the ability to access their money when needed. Now, when it comes to meeting these expectations, Public Provident Funds (PPF) and Mutual Funds are two such financial instruments that can fulfil requirements. But which one is better – PPF vs Mutual Fund? Let’s find that out together.
Mutual Fund vs PPF- What’s the Difference?
Mutual fund functions as an investment pool of money from different investors. It is managed by MF financial advisors. In contrast, PPF is a government-backed scheme. The PPF interest rate 2023 is currently running at 7.1%.
PPF vs Mutual Fund
Now that we have covered their meaning, let’s understand how PPF vs Mutual funds are way different than we imagine.
| Factor | Public Provident Fund (PPF) | Mutual Funds (MFs) |
|---|---|---|
| Investment Type | PPF is a safe & long-term government backed investment scheme among Indian citizens. Fixed-income investment with guaranteed returns. | Mutual fund schemes are managed by Asset Management Companies (AMCs) that design various types of MF schemes. Diverse investment options, including equity, debt, and hybrid funds. |
| Return on Investment (ROI) *Please refer to the following table mentioned below | Generally offers fixed and relatively lower returns, typically higher than regular savings accounts. However, the historic return rates vary around 8% p.a. | Returns can vary widely depending on the type of mutual fund and market conditions. Meaning it is market-linked. Has the potential for higher returns but comes with higher risk. |
| Liquidity | Partial withdrawals allowed after the 7th year, subject to certain conditions. | Generally offers higher liquidity as you can redeem your units anytime (subject to exit loads, if applicable). |
| Lock-in Period | 15-year lock-in period with an option to extend in blocks of 5 years. | No fixed lock-in period; investors can redeem units at any time. |
| Pre-Mature Closure | In PPF, partial withdrawals are allowed after the completion of 5 years from the end of the financial year in which the initial subscription was made. Account closure before 15 years might be with penalties. | Certain mutual fund schemes have lock-in periods. Like ELSS has a 3 year lock-in period. Therefore, an investor can stop SIP payments to stop investing but won’t be able to close before the three year period. |
| Maturity Period | 15 years, extendable in 5-year blocks indefinitely. | No fixed maturity; can be held indefinitely.ELSS mutual funds have a lock-in period of 3 years. In case of close-ended funds, one can redeem MF schemes after its expiry term. |
| Tax Benefits | Earnings and withdrawals are tax-free. PPF investments qualify for a deduction under Section 80C of the Income Tax Act. | Tax benefits depend on the type of mutual fund and the holding period. Equity-linked funds offer tax benefits on long-term gains, while debt funds may have indexation benefits. *Refer to the table for detailed analysis. |
| Reasons to Invest | 1. Safe and stable long-term savings. 2. Tax benefits under Section 80C. 3. Guaranteed returns. | 1. Diversification across asset classes. 2. Potential for higher returns. 3. Flexible investment options. 4. Liquidity for short-term needs. |
| Portfolio Diversification | Limited to government-backed debt. | Offers portfolio diversification by investing in various asset classes (equity, debt, hybrid), providing exposure to different market segments. |
* Returns From PPF Vs Mutual Funds
When comparing returns between PPF vs Mutual Funds, it’s crucial to understand the fundamental differences in how these investments perform.
| Period | PPF Interest Rates |
|---|---|
| April-June 2023 | 7.10% |
| January-March 2023 | 7.10% |
| October-December 2022 | 7.10% |
| July-September 2022 | 7.10% |
| April-June 2022 | 7.10% |
| January-March 2022 | 7.10% |
| October -December 2021 | 7.10% |
| July-September 2021 | 7.10% |
| April-June 2021 | 7.10% |
| January -March 2021 | 7.10% |
| October -December 2020 | 7.10% |
| July-September 2020 | 7.10% |
| April-June 2020 | 7.10% |
| January-March 2020 | 7.90% |
| October-December 2019 | 7.90% |
| July-September 2019 | 7.90% |
| April-June 2019 | 8% |
| January-March 2019 | 8% |
| October-December 2018 | 8% |
| July-September 2018 | 7.60% |
| April-June 2019 | 7.60% |
| January-March 2018 | 7.60% |
| October–December 2017 | 7.80% |
| July-September 2017 | 7.80% |
| April-June 2017 | 7.90% |
| January-March 2017 | 8% |
* Mutual Fund vs PPF – Tax Treatment
Let’s have a look at the tax on mutual funds down below.
| Aspect | Equity-Based Mutual Funds | Debt-Based Mutual Funds |
|---|---|---|
| Features | Invest primarily in equity stocks or equity-related instruments. | Invest primarily in debt securities like bonds, government securities, and fixed-income instruments. |
| Short-Term Capital Gains (STCG) | Taxed at a flat rate of 15% if units are sold within 12 months of purchase. | Taxed at your applicable income tax slab rate if units are sold within 3 years of purchase. |
| Long-Term Capital Gains (LTCG) | Exempt from tax for gains up to Rs. 1 lakh in a financial year. Gains exceeding Rs. 1 lakh are taxed at 10% without indexation. | Taxed at 20% with indexation benefits for gains after 3 years of holding. |
| Dividend Distribution Tax (DDT) | No DDT on equity-oriented funds. | DDT is applicable to debt funds at varying rates. Currently, it is around 28.84% (including surcharge and cess). |
Other Investment Options
In addition to Mutual Funds, there are several other investment options available for individuals looking to grow their wealth and achieve their financial goals. In this section, we will explore the merits and differences of Systematic Investment Plans (SIP), Equity-Linked Savings Schemes (ELSS), and Public Provident Fund (PPF), each offering unique advantages and considerations for investors.
PPF versus ELSS
Let’s have a look at the PPF versus ELSS differences.
| Characteristic | PPF | ELSS |
|---|---|---|
| Investment type | Debt-oriented | Market-linked |
| Returns | Fixed | Variable |
| Liquidity | Low | High |
| Tax benefits | Yes | Yes |
| Lock-in period | 15 years (with partial withdrawals allowed after 5 years) | 3 years |
| Minimum investment | Rs. 500 | Rs. 500 |
| Maximum investment | Rs. 1.5 lakhs per financial year | Rs. 1.5 lakhs per financial year under Section 80C |
SIP or PPF – Which is better?
The differences between PPF or SIP are as follows:
| Factors | PPF | SIP |
|---|---|---|
| Investment type | Debt-oriented | Market-linked |
| Returns | Fixed | Potentially higher, but also more volatile |
| Liquidity | Low | High |
| Tax benefits | Available | Available for Equity-Linked Saving Schemes (ELSS) |
| Lock-in period | 15 years (with partial withdrawals allowed after 5 years) | None |
PPF vs Mutual Fund- What Should I Choose?
The ultimate choice between mutual funds and PPF depends on your investment goals and risk appetite.
PPF offers safety, tax benefits, and a disciplined savings approach, making it a suitable option for conservative investors with long-term objectives. On the other hand, Mutual Funds provide the potential for higher returns, albeit with market risks, and are favored by those seeking growth and willing to navigate market fluctuations.
In essence, PPF is a safer bet, while Mutual Funds offer growth opportunities.
To Wrap It Up…
Public Provident Fund (PPF) vs Mutual Funds are two distinct investment avenues. The choice between mutual funds and PPF depends on individual preferences, financial goals, and risk tolerance.
Hence, when you’re considering investing in any of the choices we discussed earlier, make sure to use an online calculator to simplify your calculations. For instance, you can use smallcase SIP calculator to compute return on SIP investments.
FAQs
Mutual funds vs PPF – both are good investment options, but they have different features and benefits. PPF is a low-risk investment option with a lock-in period of 15 years. While mutual funds are a market-driven vehicle and have no lock-in period (Except ELSS funds).
No, you cannot SIP for PPF. PPF is a lump-sum investment scheme. You can make a minimum deposit of Rs.500 and a maximum deposit of Rs.1.5 lakhs per financial year.
Yes, you can claim ELSS and PPF together.
Yes, you can deposit 2 times in a month in PPF. However, the total deposits in a financial year cannot exceed Rs. 1.5 lakhs.
