PPF or Mutual Funds: Where should you invest your money?
Investors today have a wide variety of options available, a lot of which can fulfill all their investment criteria such as high returns, low risk, maintaining liquidity of portfolio and advantage of tax saving. Public Provident Fund (PPF) and Mutual Fund (MFs) are two such investment schemes. Mutual Fund is a professionally managed investment scheme which is operated by asset management companies (AMC) for the purpose of pooled investment into stocks, bonds, government securities, money market instruments etc. Mutual Funds are flexible in nature providing different schemes of investment based on the risk-return principal. Whereas Public Provident Fund is run by the central government with the aim of encouraging long term savings for the residents of India. Public Provident Fund is guaranteed by the central government. Public Provident Fund invests majorly into fixed income instruments which provide a fixed rate of return thereby maintaining the stability of return.
Aim of Investment
PPF is a savings scheme run by the government of India. Aim of PPF is to accumulate savings by providing a reasonable interest rate and tax benefits.
Mutual funds are offered by AMCs which are designed to cater different types of investor needs based on their risk capacity. Aim of MF is to create a corpus of fund to accomplish investor's financial goals.
Return on Investment
Return on PPF is calculated on an annual basis which is approximately 8 percent. The rate of return changes with changes in government policies.
The rate of return on Mutual Funds is dependent on the performance of the underlying assets. A return upwards of 12 per cent can be expected from large cap funds. Whereas a small cap fund could provide a return of 20 per cent and upwards.
Main objective of PPF is to create long term savings, such as retirement corpus, as the minimum investment tenure is 15 years. The investment objective of Mutual Fund is to accumulate and invest savings which can be used to fulfill short term objectives (buying a car), medium term objectives (college education for kids) or long term objectives (buying a house, retirement corpus creation).
Investment in PPF is tax free subject to a limit of Rs 1,50,000 every year, moreover all returns generated from PPF are exempted under Section 80C.
Mutual Funds may be taxable depending upon the scheme of investment. Long term capital gain (LTCG) of over Rs 1 lakhs would be taxable for non tax exempt funds, whereas an ELSS fund is tax free under Section 80C till a limit of Rs 1,50,000.
PPF is fixed for tenure of 15 years. PPF can be renewed in sets of 5 years after maturity. Mutual Funds have no fixed tenure. Investor can choose the time period of investment which can be as short as 6 months or till the investor wants to continue investing.
PPF are meant to be a long term investment therefore it is not liquid. However, at the end of third year, the member can avail 25 percent of the balance in the form of loan. Withdrawal can be availed from seventh year onwards. Mutual funds are liquid in nature. The investor can withdraw the balance within 1-2 days.
PPF is a risk free investment as it is guaranteed by the central government of India. All Mutual Funds have certain degree of underlying risk as these are based on market instruments. Performance of mutual funds is subject to the ups and downs of their underlying assets.
PPF has a lock in period of 15 years. Generally, Mutual Funds do not have any lock in period. The investor has the flexibility of exiting the investment scheme any time they please.
PPF invests majorly in fixed income investments. Mutual Fund provides the benefit of diversification by investing in equities, fixed income instruments, money market instruments which hedges the risk while maintaining return for investor.
The PPF Act 2016 allows premature closure of the PPF account only in the following conditions:
- Account must have completed 5 years.
- Amount is required for treatment of life threatening diseases.
- Higher education of account holder.
For certain mutual funds which have a lock in period for example ELSS (Equity linked savings scheme) which has a lock in period of 3 years. An investor can stop SIP payments but cannot withdraw the balance before 3 years.
Though PPF is not a bad investing alternative, considering the above-cited points, mutual funds are a clear winner against PPF. However, it is recommended to consult a financial advisor, who will construct a goal based investment strategy based on your needs, financial goals, risk profiling and overall financial situation.