Which is better PPF or mutual fund?

Investment in tax-saving instruments is stacked aside with a Future Goal in Mind. In line with this, an individual in the prime of their professional life has options ranging from debt-linked instruments(like PPF, etc.) to equity-linked instruments(like ELSS, etc.)

Public Provident Fund(PPF)

PPF: Public Provident Fund
  • PPF is a fixed return investment with an interest rate decided by the Government of India on a quarterly basis. It is linked to the 10-year government bond yield
  • It is fixed at the beginning of a quarter based on the average bond yield in the previous three months. The rate of interest at present is 7.1% per annum (as of April 2020)
  • Interest received is tax-free
  • As per existing PPF rules, a minimum annual deposit of Rs. 500 has must be made in the account to keep it active. The maximum annual contribution allowed in PPF is currently capped at Rs. 1.5 lakh
  • The entire balance can be withdrawn on maturity
  • The PPF account has a maturity period of 15 years. But what is less well known is that this maturity period is not calculated from the date of account opening. The 15 year maturity period of a PPF account is calculated from the end of the Financial Year in which the first investment was made
  • A subscriber is allowed to make partial withdrawals from the PPF account after the completion of 5 financial years
  • A subscriber can close a PPF account only after the start of the 7th year from the date of opening the account

Equity Linked Savings Scheme (ELSS)

ELSS: Equity Linked Savings Scheme
  • ELSS is market Linked. It is a Mutual Fund with a lock-in
  • It has a lock-in period of 3-Years (Shortest among its peers)
  • The maximum annual contribution allowed in ELSS is currently capped at Rs. 1.5 lakh
  • The entire balance can be withdrawn on maturity
  • The returns are on an average > 12%
  • Capital Gains are taxable @10% with an exemption of Rs 1 lac per yr. For example, if the final amount is Rs. 4 lacs on an investment of Rs. 1 lac, then we need to pay a 10% tax on 3 lacs (capital gain)
ELSS Performance (Table for Illustration, not to be taken as a recommendation)

  • As the instrument is Market-Linked, investing a large amount at one go can be risky. To overcome this, the SIP route is much more preferred
  • A subscriber is not allowed to make partial withdrawals before maturity
  • Any Indian Individual can open an ELSS account
ELSS v/s PPF (Indicative Differentiation)

As we have seen both the tax-saving instruments, the option for choosing one should be decided based on:

  1. Risk Appetite
  2. Money Available to Parked
  3. Time Horizon for the money to grow
  4. Life-Goals
  5. Need for Money & its quantum at any given point in time

Consult a financial advisor or do your research in line with your goals prior to investing your money.

Hope this helps

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Happy Investing!!

References:

  1. 12 Most Important Features of Public Provident Fund (PPF)
  2. PPF (Public Provident Fund) Account – Benefits, Withdrawal & Interest Rates 2022 – Complete Guide
  3. PPF – Personal Banking
  4. PPF Calculator – Public Provident Fund Calculator Online | PPF Investment Calculator
  5. PPF (Public Provident Fund): All about PPF account opening, closing, transfer, interest rates
  6. BOI | Bank of India
  7. Public Provident Fund (India) – Wikipedia
  8. Best tax saving options: Here is a comparison of 10 investment options
  9. Where your PPF, Sukanya Samridhhi, Post Office money goes
  10. PPF: 7 things you should know about Public Provident Fund
  11. ELSS or PPF: Which One Should You Invest in?

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