MF vs PPF
In today’s time, there are a plethora of options for long-term investors. There’s a plan to suit each investment purpose. From low-risk investments to high returns, there are various options. However, the abundance of options also creates confusion, especially for new investors. At times, it can become tough to choose the right one. For instance, mutual funds and PPF are two of the popular long-term investment plans. If you have to choose one, you need to understand mutual funds vs PPF (MF vs PPF).
Investment Risk
PPF is a risk free investment and is guaranteed by the Indian Government. One of the biggest PPF Account benefits is that your investment will earn a fixed annual interest. The Central Government sets the PPF interest rate every year.
Mutual funds are comparatively riskier than PPFs because they invest in stocks and therefore prone to risk. However, Debt funds (which is also a type of MF) vary in value due to changes in the prices of the bond market. But debt funds are safer and more stable in nature.
Returns Potential
The annual interest your PPF Account can earn is generally around 8% (at present 7.1%, it is declared by the government every year). The returns are fixed, and you are sure to earn the applicable interest every year without any risk.
Mutual Funds are of many different types and the returns vary as per the type of fund you select. There are liquid funds that generally offer returns in the range of 7% – 9% per annum and then there are equity funds that can provide 10% – 15% per annum or even more. However, there is no guarantee of return as the performance of the fund depends largely on the market conditions.
Investment Duration
A significant difference between PPF and Mutual Fund is investment duration. With PPF, the minimum investment duration is 15 years. You can also renew your PPF Account in sets of 5 years after maturity. Due to the long investment tenure, PPF is generally ideal for long-term savings.
Mutual Funds do not have any such fixed investment tenures. You can invest in them even for six months or until the time you want to remain invested. This flexibility with regards to the tenure makes Mutual Funds ideal for different types of investment objectives.
Tax Savings
PPF investment is tax-free up to a limit of Rs 1.5 lakh in a year. Even the returns generated from PPF are tax-exempt under Section 80C of the Income Tax (IT) Act.
There are tax saving Mutual Funds known as Equity-Linked Savings Scheme (ELSS) which offer tax exemption of up to Rs 1.5 lakh in a year under Section 80C. Apart from ELSS, all the other types of Mutual Funds are taxed based on the type of fund and investment tenure.
Portfolio Diversification
When you invest in PPF, your money would be mostly invested in instruments that offer fixed returns.
One of the biggest benefits of Mutual Funds is portfolio diversification as there are many different types of funds that invest your money in many different types of securities. This allows you to select a particular type of fund that best suits your portfolio and investment objective.
Liquidity
Mutual funds offer high liquidity. You may exit even after 1 day of investment. However, in some schemes, an exit load may be imposed for early exit. Under ELSS (Equity Linked Savings Scheme), there is a 3-year lock-in period.
PPF doesn’t offer high liquidity. It has a mandatory lock-in period of 15 years. After the 3rd year, a partial withdrawal of 25% of PPF investment is permitted as a loan. Under special reasons, 50% amount withdrawal is permitted after 5 years.
Investment amount
The mutual fund investment amount is indefinite. You may invest any amount of your choice.
In PPF, investors can invest any amount between ₹500 to ₹1.5 lakhs per annum.
Making the Decision
As can be seen, PPF and Mutual Funds both have their benefits. The decision between PPF versus Mutual Fund depends on what an investor is looking for.
If you are looking for a safe investment with fixed returns and tax benefits, PPF is the way to go. But if you do not mind carrying investment risk for higher returns and have long-term objectives, you can browse through the different types of Mutual Funds available.
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