How exactly are 7.1% PPF returns better than 12% returns of mutual funds?

Investing in the market or going for government-backed debt instruments(like PPF, KVP, Fixed Deposit, etc.) is a question that bogs many first-time investors.

PPF or Mutual Fund?

So, let us go step by step to understand why and when to opt for PPF or Mutual Funds

First, let us understand PPF(Public Provident Fund)

  1. PPF is an instrument for the general public that was introduced by the Government of India in 1968. It was meant to aid individuals(who cannot avail of EPF) to save money from tax deductions and for retirement planning
  2. PPF Interest & Final Corpus Generated at Maturity comes in the Exempt-Exempt-Exempt (EEE) category
    1. Interest income is totally exempt from Income Tax
    2. The Amount outstanding to the credit is fully exempted from Wealth Tax
    3. Deposits made in the PPF are deductible under Section 80C of the Income Tax Act
  3. The tenure for PPF is 15years
  4. Offers guaranteed risk-free returns
  5. The account can be opened in any Post Office, Nationalised Bank(Like SBI, Bank of Baroda, etc.), or Private Banks (Like HDFC Bank, Axis Bank, etc.)
Investment Vehicle in India: Public Provident Fund (PPF)

Second, let us understand Mutual Fund

  1. Mutual Fund is linked to the market(equity-oriented, debt-oriented, hybrid, etc.)
  2. Based on the trailing data, Mutual Funds beat instruments like Fixed Deposit, PPF, KVP, etc.
  3. As the underlying asset of a Mutual Fund is susceptible to risks (like inflation, interest rate hike, wars, etc.), they tend to be volatile in the short term
  4. There is no concept of guaranteed returns. In a volatile period, the returns can be negative or near 0%
  5. Except for Closed Ended Mutual Funds, the maximum lock-in period is around 3years for ELSS(Equity Linked Savings Scheme) Mutual Fund(the shortest among all 80C options for tax savings)
Working of a Mutual Fund

So, who should opt for PPF and who should opt for Mutual Funds

  • PPF is for individuals who have a low-risk appetite
  • PPF is a government-backed scheme, and the investment is also not market-linked (returns are assured)
  • PPF Lock-in period can be a deterrent for many individuals
  • PPF with below 10% returns will find it hard to beat inflation exceeding 6–8%
  • Mutual Funds are volatile in short term but are efficient to create/building wealth in the long term
  • 3-year window for ELSS is a huge positive
  • Like PPF, ELSS or any other mutual fund(including debt-oriented) are not tax-exempt. Any capital gain/appreciation is taxed according to the tax bracket. The current LTCG(Long-term Capital Gain) Tax is 10%.
  • Debt Mutual Funds when held for more than 3-years can aid in getting respite in LTCG through the use of indexation

In the end, based on the risk appetite, time horizon, capital at disposal, life goals, and portfolio diversification – an individual can choose one of the vehicles for future security and tax savings.

Hope this helps

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Happy Investing!!


  1. PPF, Public Provident Fund – Benefits & Interest Rate in 2022
  2. PPF – Personal Banking
  3. ELSS Funds – What is ELSS, Invest in ELSS Funds in 2022
  4. Tax Saving Investment Option

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