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Mutual funds vs Public Provident Fund(PPF) – Which one to choose

People have a lot of confusion as to which is better Mutual funds or PPF. Both of them are the most popular savings instruments with good returns. But as an investor, it is important to compare and know the various investment options available in the market and invest accordingly. Investment should not be based on the returns or tax exemptions. One should have an overall knowledge of the investments.  Before starting with the comparison between the two it is important to know them.

Public Provident Fund (PPF)

Public Provident Fund (PPF) is a long-term savings investment options established by the Govt. of India in 1968. It offers tax benefits on withdrawal as well as on contributions. It inculcates the habit of savings amongst Indian citizens for their life after retirement. PPF is backed by the Indian government and offers guaranteed, risk-free returns as well as complete capital protection.

Features of PPF

  • Eligibility:  The applicant must be an Indian resident. NRIs and HUFs are not allowed to invest in PPFs
  • Investment: PPF allows a minimum investment of Rs 500 and a maximum of Rs 1.5 lakh for each financial year. Investments can be made in lump sum or in a maximum of 12 installments. The account can be opened with just Rs 100. Returns- Govt announces interest rate every quarter based on G-secs.
  • Investment tenure: The PPF has a tenure of 15 years. The tenure can be extended in blocks of 5 years as many times as you want. The lock-in period is 15 years.
  • Withdrawals: PPF permits partial withdrawals after the account has completed 6 years.The withdrawal can be a maximum of 50% of the closing amount at the end of the 4th year.
  • Loan against PPF:  You can take a loan against your PPF account between the 3rd and 5th year. The loan amount can be a maximum of 25% of the 2nd year immediately preceding the loan application year
  • Tax implications:  PPF enjoys E-E-E status (Exempt-Exempt-Exempt) wherein the contribution, interest, and withdrawals are tax exempted. PPF also enjoys the benefits of 80C wherein the contribution (up to 1.5 lakhs) is deducted from your annual income to arrive at your taxable income which sometimes helps in reducing your tax slab rate.

Mutual Funds

A mutual fund is an investment vehicle that pools the money of a large group of investors and invests this in stocks, bonds, money market instruments and other types of securities. There are three broad categories of Mutual Funds.

  •  Equity-oriented schemes: Invest in stocks to earn high returns. These bear high-risk also.
  •  Debt-oriented schemes: These are low-risk investments. Returns are typically 2-3% higher than FD, with full liquidity.
  •  Balanced schemes: these invest a portion in equity and rest in debt. Therefore they bear moderate risk and give moderate returns.

Features of Mutual Funds

  • Eligibility:  Anyone having a bank account and PAN card invest in Mutual Funds.
  • Investment:  There is no such limit of minimum investment. One scheme offers SIP of Rs 100. Also, there are few good schemes with Rs 500.
  • Returns:  Mutual Funds returns are market linked. The following table looks at average 3-year returns as per different categories.

  • Lock-in period:  Overall, mutual funds do not have a lock-in period. However, ELSS (Equity Linked Savings Scheme) similar to PPF, have a lock-in period of 3 years.
  • Liquidity:  Most mutual funds are 100% liquid. Although close-ended schemes have some liquidity issues.
  • Tax implications:  Equity oriented mutual funds (>65%) are tax-free if held for more than one year. Investments of up to Rs 1.5 lakh in ELSS funds earn a tax rebate under Section 80C every year. The returns generated by the investments are also tax­-free in the hands of the investor after completion of the 3­ year lock­-in period.

So now after studying mutual funds and PPF, we can make a comparison between the two on the following grounds:

  1. Debt funds v/s PPF: A senior citizen having a huge corpus (retirement lump sum) to either invest in PPF or go for Debt Funds.
  2. ELSS v/s PPF- both enjoy the benefits of 80C
  3. PPF v/s Equity Oriented Mutual Funds as an Investment Option for capital appreciation

Debt-oriented mutual funds V/s PPF

Debt-oriented mutual funds invest in Govt. Securities (G-Sec), corporate bonds, PSU Bonds and other Debt Securities which help in generating secured returns.

Equity Linked Savings Scheme (ELSS) v/s PPF

ELSS are tax saving mutual funds that you can use to save income tax of up to Rs 1.5 lakh under Section 80C. ELSS funds have a lock in period of 3 years and invest a majority of their portfolio in the stock market.

Your investment choice should be guided by your investment objectives and your risk tolerance level and liquidity requirements. Investors with high-risk tolerance should invest in ELSS, while investors with low-risk tolerance should invest in PPF.

Equity Oriented Mutual Funds v/s PPF

Equity Oriented Mutual Funds are those in which more than 65% of the funds are invested in equities. The risk in these funds is higher than that of the debt oriented mutual fund schemes.

Pragati Rajoria

Pragati Rajoria

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About Me

I’m a Commerce Graduate & CFP Professional, engaged in blogging since 3 years. I’m not affiliated with any financial product. The purpose of writing blog is to spread financial awareness and help people in achieving excellence for money. Please note that the views expressed on this Blog/Comments are clarifications meant for reference and guidance of the readers to explore further on the topics. These should not be construed as investment advice or legal opinion.

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