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PPF vs Mutual Funds – Comparison, Returns, Tax & Which is a Better Option

Let us go through a detailed comparison between Public Provident Fund and Mutual Funds.

Investing based on the risk profile

Investors have different risk profiles, so they should invest based on their risk profile. People with a conservative risk profile can consider investing in debt products like Public Provident Fund (PPF). But, they will have to be content with low to moderate returns. People with an aggressive risk profile can consider investing in equity mutual funds. These are high-risk, high return potential products. This blog will focus on PPF vs. mutual funds – Comparison, returns, tax, and which is a better option.

What is PPF?

Public Provident Fund (PPF) is a fixed income product offered by the Government of India (GOI) under its bouquet of small saving schemes. It has a tenure of 15 years, which can be extended on maturity. A depositor can contribute up to Rs. 1,50,000 every financial year and avail of tax benefits on it under Section 80C of the Income Tax Act. The Government declares the interest rate payable every quarter. On maturity, the investor gets the accumulated corpus which includes the principal and interest.

Now that we understand what PPF is, let us understand the difference between equity mutual fund SIP vs PPF.

PPF vs mutual fund

Some of the differences between PPF and an equity mutual fund SIP include the following:

FeaturePPFEquity mutual fund SIP
What is it?A PPF is a fixed income product in which an investor can make regular contributions every financial year.An equity mutual fund SIP is a market-linked financial product in which an investor can invest a fixed amount every month for a specified period.
Investment tenureThe investment tenure of PPF is 15 years. On maturity, it can be extended in blocks of 5 years at a time.There is no defined tenure for an equity mutual fund SIP. You can decide the tenure. You also have the option to pause or redeem the SIP before its tenure.
Risk profilePFF is recommended for investors with a conservative risk profile.An equity mutual fund is recommended for investors with an aggressive risk profile.
ReturnsThe Government declares the interest rate payable on PPF quarterly. It is a floating interest rate product.The returns on an equity mutual fund SIP are market-linked. The returns will depend on the share price movement of the underlying securities held by the scheme.
LiquidityPPF has a lock-in period of 15 years. However, you can take a loan or make partial withdrawals, subject to certain terms and conditions. So, the liquidity is low in PPF.Equity mutual fund SIP doesn’t have a lock-in period, except for an Equity Linked Savings Scheme (ELSS) SIP. You can redeem your units at any time. The redemption money is transferred to your bank account in two working days.
Tax benefitsContribution of up to Rs. 1,50,000 in a financial year qualifies for deduction from taxable income under Section 80C of the Income Tax Act. The annual interest is tax-free. On maturity, the principal and interest are tax-free.Investment in an equity mutual fund SIP does not qualify for a tax benefit, except for an ELSS SIP. On redemption, the short-term capital gain is taxed at 15%. The long-term capital gain is taxed at 10% without indexation benefit, after exempting the first Rs. 1 lakh in a financial year.

The above comparison will help you choose between PPF or mutual fund SIP.

Comparison of returns between mutual funds and PPF

As discussed in the earlier section, the PPF is a floating interest rate investment product. At the end of every quarter, the Government declares the interest rate payable for the next quarter. For example, by the end of March, the Government declares the interest rate payable for the April to June quarter. For example, the current interest rate payable on PPF for the April to June 2022 quarter is 7.10% p.a.

An investor can expect low to moderate returns from PPF. As the investment risk in PPF is borne by the Government, PPF is recommended for investors with a low-risk appetite.

The returns from an equity mutual fund SIP are completely market-linked. The returns will depend on the share price performance of the underlying securities held by the mutual fund scheme. In the long run, equities have the potential to deliver inflation-beating high returns. Your returns will also depend on the type of equity mutual fund scheme you have chosen, like a large, mid, or small-cap fund. These are broad market capitalisation mutual funds. You can also choose from sectoral or thematic mutual funds. These are relatively riskier than market capitalisation funds. In general, mutual fund schemes are high-risk, high return potential products.

Tax treatment of equity mutual funds

If you sell your mutual fund units within 12 months of purchase, the short-term capital gain will be taxed at 15%. If you sell your mutual fund units after 12 months of purchase, the long-term capital gain will be taxed at 10% without indexation benefit. The first Rs. 1 lakh long-term capital gain in a financial year is exempt from taxation.

How to choose between equity mutual funds and PPF?

Most investors wonder whether SIP or PPF which is better? The choice of PPF or SIP will depend on the investor’s risk profile and other factors. So, if an investor has a conservative risk profile, they may consider investing in PPF. If an investor has an aggressive risk profile, they may consider investing in an equity mutual fund through SIP.
To start investing in mutual funds as per your appropriate asset allocation, download the Glide Invest App from Google Play Store or Apple App Store and get started.

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