Today, people are increasingly using PPF and mutual fund schemes to plan out their investments and accumulate money for their retirement.
A mutual fund is a professionally managed investment pool that invests in financial instruments such as stocks, bonds, government securities, money market instruments, gold, and so on.
Based on the investor’s appetite for risk, mutual funds are classified as equity-oriented, debt-oriented, or hybrid. Systematic investment plans are the most popular way to invest in mutual funds (SIP). A SIP allows you to invest a predetermined amount in a mutual fund scheme on a regular basis.
Likewise, the Public Provident Fund (PPF) is a long-term scheme run and guaranteed by the Central Government with the goal of encouraging citizens to save. PPF invests primarily in fixed income securities, which generate a fixed rate of return and provide income stability.
While both instruments have advantages and disadvantages, we will compare their features to gain a better understanding of what works best in which situation.
Offered by whom?
A Public Provident Fund is a kind of savings scheme backed by the Government. It is a popular savings option in India, intending to accumulate funds to build a corpus while providing a moderate rate of interest and tax advantages.
On the other hand, mutual funds are operated by Asset Management Companies (AMCs), which pool the investors’ money and invest them in a variety of securities.
The mandatory lock-in period for PPF is 15 years. But except for closed-ended funds, most mutual funds do not have a lock-in period. The investor has the option to exit from the investment scheme at any time.
Under a PPF scheme, your investment will earn a set amount of interest each year. Every year, the Central Government determines the PPF interest rate. As a result, there is no risk of losing one’s capital investment.
On the other hand, although mutual funds are generally known to provide higher returns than PPF, the returns are not guaranteed. The return generated by each mutual fund scheme is determined by the performance of the underlying assets. These returns are generally market-linked.
Mutual funds are riskier than PPFs because they invest in stocks, which are prone to risk. For example, the value of equity funds fluctuates due to the volatility of the stocks in which the fund invests. Similarly, the value of debt funds fluctuates in response to changes in bond market prices. However, debt funds are typically safer and more stable in nature.
The annual interest rate on your PPF Account is typically around 8%. Every year, returns are fixed at the applicable interest rate and are risk-free.
The rate of interest earned on PPF since the inception of the scheme has been shown in the following table:
|Year||Rate of Interest (%)|
|1968-69 TO 1969-70||4.8|
|1970-71 TO 1972-73||5|
|01.04.1974 TO 31.07.1974||5.8|
|01.08.1974 TO 31.03.1975||7|
|1975-76 TO 1976-77||7|
|1977-78 TO 1979-80||7.5|
|1981-82 TO 1982-83||8.5|
|1986-87 TO 1998-99||12|
|01.04.1999 TO 14.01.2000||12|
|15.01.2000 TO 28.02.2001||11|
|01.03.2001 TO 28.02.2002||9.5|
|01.03.2002 TO 28.02.2003||9|
|01.03.2003 TO 30.11.2011||8|
|01.12.2011 TO 31.03.2012||8.6|
|01.04.2012 TO 31.03.2013||8.8|
|01.04.2013 TO 31.03.2016||8.7|
|01.04.2016 TO 30.09.2016||8.1|
|01.10.2016 TO 31.03.2017||8|
|01.04.2017 TO 30.06.2017||7.9|
|01.07.2017 TO 31.12.2017||7.8|
|01.01.2018 TO 30.09.2018||7.6|
|01.10.2018 TO 31.06.2019||8|
|01.07.2019 TO 31.03.2020||7.9|
|01.04.2020 TO 30.09.2021||7.1|
In the case of mutual funds, returns vary depending on the type of fund you choose. Liquid funds can provide returns ranging from 7% to 9% p.a., while equity funds can provide returns ranging from 10% to 15% p.a. However, there is no guarantee of a return because the fund’s performance is dependent on market conditions.
The primary goal of a PPF is to build a long-term savings corpus over a 15-year investing period.
And the purpose of a mutual fund’s investing strategy is to aggregate each individual investor’s money into a pool and cumulatively invest it in a financial instrument in order to generate maximum returns. The rationale is to meet short-term (holiday fund), medium-term (children’s education fund), and long-term (retirement planning) goals of the investor depending on his/her risk appetite.
Duration of investment
Mutual funds do not have a set tenure of investment. You can invest for as little as six months or as long as you want to remain invested in the fund. Investors have the option of selling their mutual fund units to exit. Thus, depending on their risk appetite, they can hold the MF scheme for a short or long period of time.
Contrary to this, the minimum investment time frame in a PPF is 15 years. After maturity, you can also renew your PPF account in 5-year increments. Hence, it is ideal for long-term savings.
PPFs are long-term deposits with a low level of liquidity. Loans on PPF are available from the end of the third year until the end of the sixth year, calculated from the date of account opening. The maximum loan available is equal to 25% of the previous year’s opening balance in the PPF account.
After completion of the sixth year from the date the PPF account was opened, no loan can be taken out, but partial withdrawals can be made. Withdrawal (partial) is permitted from the seventh year onwards.
Mutual funds, on the other hand, offer a high degree of liquidity. An investor can stay invested even for a single day. Moreover, mutual fund companies for certain funds also apply a penalty in the form of exit load if one wishes to redeem the mutual fund units within a stipulated time.
In addition, closed-ended funds with investment terms of 3-4 years can be redeemed only when the term expires. For example, ELSS or tax-saving funds have a lock-in period of 3 years.
PPF investments are tax-free up to Rs 1.5 lakh per year. Moreover, the returns (or interest) generated from PPF are also exempt from taxation under Section 80C. The corpus amount of PPF upon maturity and partial withdrawals too are exempt from tax. In other words, PPF as an investment vehicle enjoys a one of its kind ‘exempt, exempt, exempt’ tax treatment.
When it comes to MFs, there are tax-saving mutual funds known as ELSS that provide tax exemptions of up to Rs 1.5 lakh. Aside from ELSS, all other types of MF are taxed differently depending on the type of fund and investment tenure.
An ELSS fund, as the name implies, is an equity-oriented scheme with a three-year mandatory lock-in period. Many taxpayers have turned to ELSS schemes in recent years to take advantage of tax exemptions. If you invest in ELSS schemes, you can get a tax exemption on the amount you invest up to Rs. 150,000. Furthermore, the income earned under this scheme at the end of the three-year period will be considered Long Term Capital Gain (LTCG) and will be taxed at a rate of 10% (if the income is above Rs. 1 lakh).
There are numerous types of mutual funds that invest your money in many different types of securities. You can choose the fund that best meets your portfolio’s objectives. One’s portfolio can contain a variety of asset classes such as equity, fixed income instruments, money market securities, and so on (equity, hybrid, debt funds).
On the other hand, in the case of PPF, your money would be mostly invested in instruments that offer fixed returns.
Key takeaways – PPF and Mutual Fund
|Nature of difference||Mutual Funds||PPFs|
|Provided by||AMCs||Central Government|
|Investment risk||High risk||Low or risk-free|
|Returns potential||Returns are not guaranteed||Fixed annual interest|
|Investment duration||Can be anything (6 months or as long as you want)||Minimum 15 years|
|Tax savings||Depends upon the type of fund and investment tenure||Up to Rs. 1.5 lakh per year under Section 80C|
|Liquidity||A high degree of liquidity||A low degree of liquidity|
|Goals of investor||Could be short-term, medium-term, or long-term||Long-term|
Which is better? – PPF or Mutual fund
PPF is the way to go if you want a safe investment with fixed returns and tax benefits. However, if you are willing to take on investment risk in exchange for higher returns and have long-term goals, you can choose from a variety of mutual funds.
Both PPF and mutual fund schemes can be beneficial for you. The choice varies from individual to individual.
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