Mutual funds and PPF are both good investment options in India, but the right choice for you depends on your individual financial goals and risk appetite.
Overview
Mutual funds and the Public Provident Fund (PPF) are two distinct investment options. Mutual funds provide the possibility of larger profits but also increased risk since they combine the money of many participants to invest in a diverse portfolio of stocks, bonds, and other assets. On the other hand, PPF is a government-backed savings scheme in India with fixed, tax-free returns and a longer lock-in period, providing more security but lower returns. Your investing horizon, financial objectives, and risk tolerance will determine which option is best for you.
Basics About Mutual Funds
A mutual fund is ideally a vehicle to keep investors’ money. The money collected is invested in bond equity, short-term liquid instrument gold, etc., to give the investor the benefits of growth stability, wealth creation liquidity, or a combination of everything. Every mutual fund scheme has some objective aligning with the primary goal. The aim would be defined in the memorandum of the fund, and the trustee will ensure that the fund aligns with the core principles in the message.
By investing in the mutual fund, you can access the markets that might be unavailable to you and avail yourself of the professional fund management services offered by the asset management company. The concept of the mutual fund primarily relies on the two ideas of risk diversification. This helps the mutual fund overcome the issue.
The primary role of the mutual fund is to help the investors earn income or build wealth. Mutual funds are pretty flexible and construct a scheme for various investment objectives. It can target needs including wealth creation, tax efficiency, secular income, and macro defense. Mutual funds are also the companies that raise funds to the depth by investing in debt instruments.
Comparison Between Mutual Fund vs PPF
| Feature | Mutual Fund | PPF |
| Type of investment | Market-linked investment | Debt-oriented investment |
| Risk | High to low | Low |
| Returns | High to low | Moderate |
| Liquidity | High (except ELSS) | Low (15-year lock-in period) |
| Tax benefits | Provided under Section 80C of Income Tax Act (up to ₹1.5 lakh per financial year) | Provided under Section 80C of Income Tax Act (up to ₹1.5 lakh per financial year) |
| Investment horizon | Short-term to long-term | Long-term (15 years) |
| Minimum investment amount | Varies depending on the mutual fund scheme | ₹500 |
| Investment mode | Lump sum or SIP | Lump sum |
| Suitability | Suitable for all types of investors | Suitable for investors with a low-risk appetite and long-term investment horizon |
Investment Risk
PPF is mainly a savings scheme that the government backs. One of the enormous PPF account benefits is that your investment will earn fixed annual interest. Mutual funds are prominently known to provide maximum returns compared to the PPF, and the returns are not fixed here.
Returns Potential
The annual rate of interest given on the PPF account is around 8% generally. The returns would be fixed, and you will earn that applicable interest annually without risk. On the flip side, mutual funds are available in various segments, and the returns vary as per the type of investment plan you choose. Some liquid funds offer returns of 7% to 9% per annum, and the equity funds would be 10% to 15% every year or even more. But there is no guarantee or return as the fund’s performance mainly depends on the conditions available in the market.
Duration Of The Investment
The significant difference between PPF and mutual funds is the investment timeline. The minimum investment for PPF is 15 years, and you can renew the PPF account in 5 years, set after the maturity date. PPF is generally perfect for long-term savings if you want a long-term investment tenure. Furthermore, you need to know that mutual funds do not have any fixed investment tenure. You can invest in the mutual fund after every six months or until the time you want to remain invested. The flexibility of assignment makes mutual funds perfect for different types of investment savings.
Tax Savings
PPF investment is a tax-free investment option that has 1.5 lahks as a tax-free limit every year. Even the returns generated from the PPF would be tax exempted under section 80 C of the Income Tax Act. Some tax-saving mutual funds are prominent as equity-linked savings schemes, whose after-tax exemption would be 1.5 lahks in years under section 80 C. Besides the equity-linked saving scheme, all other types of mutual funds would be based on the kind of funds and the fund’s timeline.
Diversification Of The Funds
You need to know that whenever you invest your money in PPF, money is invested in instruments that generally offer a fixed return. One of the best parts about mutual funds is that you can avail portfolio diversification as there are different types of funds out there that invest in the money, and other types of securities are also available. It allows you to select a specific fund that aligns with the portfolio and the objectives.
When deciding between PPF and mutual funds, it all depends on what type of investment you’re looking at and what your goals are. A mutual fund is your go-to option if you do not mind carrying some investment risk for better returns.
Click Here: Online PPF Calculator
Returns from PPF vs Mutual Funds
| Feature | PPF | Mutual Funds |
| Returns | Fixed and guaranteed by the government | Variable, depending on market conditions and fund manager performance |
| Risk | Low | High to low |
| Potential for high returns | Low | High |
| Time horizon | Long-term (15 years) | Short-term to long-term |
| Tax benefits | Yes | Yes |
| Suitability | Suitable for investors with a low-risk appetite and long-term investment horizon | Suitable for investors with a moderate to high-risk appetite and short-term to long-term investment horizon |
Conclusion:
In the debate between Mutual Funds and Public Provident Fund (PPF), the choice hinges on individual financial goals, risk appetite, and investment horizon. Although mutual funds have the potential to yield larger returns, they also include market-related risks. In contrast, PPF offers a reliable and secure means of long-term saving as well as tax advantages. Careful consideration of one’s unique financial goals and needs should inform the choice. Ultimately, a well-informed choice aligns with the pursuit of financial security, wealth accumulation, and the fulfilment of individual financial aspirations. Whether it’s the dynamism of Mutual Funds or the security of PPF, both investment options have their place in a well-rounded financial portfolio, each serving a unique role in helping individuals secure their financial future.
FAQs
Which is better PPF or mutual fund?
It depends on your individual investment goals and risk appetite. While mutual funds provide the possibility for larger returns but are subject to market risk, PPF is a safer alternative with set returns. PPF is a superior alternative if you're searching for a low-risk investment option with guaranteed returns. If you are comfortable with market risks and are looking for the potential to generate higher returns over the long term, then mutual funds are a better option.
Which is better PPF or SIP?
One way to invest in mutual funds is through a systematic investment plan, or SIP. It enables you to regularly invest a certain amount of money in a mutual fund plan. SIP and PPF do not preclude one another. You can invest in both PPF and SIP to diversify your portfolio and reduce overall risk.
What are the disadvantages of PPF?
1. 15-year lock-in period: PPF has a 15-year lock-in period, which means you cannot withdraw your money before then. However, you can make partial withdrawals after 5 years
2. Limited flexibility: PPF offers limited flexibility in terms of investment and withdrawal options
3. Lower returns: PPF offers lower returns than some other investment options, such as equity mutual funds.
| Disclaimer: This blog is just for informational purposes and does not suggest or support investing in Mutual funds. Remember mutual funds are subject to market risks. It’s paramount to consult investment experts before making investments. Vakilsearch does not endorse and does not recommend making investments to the readers. |
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