Mutual Funds Vs PPF: Which Is the Better Investment Instrument?
Investors have a plethora of investment options to choose from to suit each investment goals, be it beating the market returns, low risk, liquidity focused instruments or tax benefits. Public Provident Fund (PPF) and Mutual Fund (MFs) are two such investment options available to investors in India.
However, the two products are not comparable as they serve different purposes.
Mutual Fund functions as a professionally run investment pool that allocates money towards financial instruments like shares, bonds, government securities, money market instruments, gold etc. PPF is managed by the government.
Public Provident Fund is a long-term scheme operated and guaranteed by the Central Government with the idea of instilling savings culture amongst citizens.
Comparison Between Mutual Fund vs PPF
|
Particulars |
Mutual Fund |
Public Provident Fund |
|
Investment Type |
Mutual fund schemes are extended by AMCs which design various types of MF schemes with diverse portfolio mix based on the risk profile of the investor. The corpus invests in financial securities to generate returns to attain the investment goals of the investors. | PPF is a popular savings option run by the Government of India with the goal of accumulating savings to build a corpus, while providing a moderate rate of interest and tax benefits. |
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Return on Investment (ROI) *Please refer table below for returns |
The return generated from each mutual fund scheme, is dependent on the performance of the underlying assets.
The returns of mutual funds are generally market linked. Thus, the market performance, as well as the strategy of the fund manager and fund allocation in each asset class, has an impact on the MF returns. |
Return on PPF is computed on an annual basis.
As per historic trends, the rates vary around 8% p.a. The rate is subject to change as per government policies. The rate is defined every quarter. The returns on PPF are fixed and guaranteed by the government. Thus, there is no risk of losing one’s capital investment. |
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Investment Rationale |
The investment goal of mutual fund is to accumulate the investment of each individual investor in a pool and cumulatively invest the amount in a financial instrument, to generate superior returns.
The rationale is to achieve short term (fund a vacation),medium term(fund children’s education) and long term goals(retirement planning) of the investor, based on the risk appetite. |
Main goal of PPF is to create a long term savings corpus, over an investing tenure of 15 years. |
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Tax Benefit |
The tax treatment of mutual funds depend upon the kind of scheme and the period of investment. **Refer table below for tax treatment | Investment in PPF is tax free up to a limit of Rs 1,50,000 under Section 80C of the Income Tax Act, 1961, for each financial year. The interest on the PPF is also tax exempt but must be declared in the income tax return filed each year.
The PPF corpus amount upon maturity is also exempt from tax. In other words, PPF as an investment instrument enjoys a unique ‘exempt, exempt, exempt’ tax treatment. |
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Maturity Period |
Mutual Funds have no definite fixed tenure of holding. Investors can choose to exit by selling their mutual fund units.
The period of holding on to the MF scheme can be either short term or long-term horizon, depending on their risk appetite |
PPF has fixed investment tenure of 15 years. Upon maturity, PPF may be subsequently renewed in batches of 5 years thereafter. |
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Liquidity |
Mutual funds offer a high degree of liquidity. One can stay invested even for a single day.
Mutual fund houses for certain funds impose a penalty called as exit load if one was to redeem the mutual fund units within a stipulated amount of time. In case of close-ended funds, with an investment tenure of 3-4 years, one can redeem such mutual fund schemes only upon expiry of the term. ELSS or tax saving funds have a lock-in period of 3 years |
PPF are long term deposit options with low degree of liquidity.
At the end of the third year, the subscriber can avail 25% of the balance in the form of loan. Withdrawal is permitted from the seventh year onwards for special reasons only. PPF deposits have a mandatory lock-in period of 15 years which is why mutual funds are more liquid in this comparison. One can avail a loan against PPF deposits accumulated from 3rd to 6th year of account opening. One can also make a partial PPF withdrawal after the expiry of 5 years from the end of the year of account opening. |
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Risk/Safety |
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Mutual funds are comparatively riskier than PPFs because they invest in stocks and therefore prone to risk. The value of equity funds fluctuates due to stock price volatility of the stocks held by the fund. Debt funds vary in value due to changes in the prices of the bond market. But debt funds are safer and more stable in nature. You must remember that not all mutual funds are risky. There are low risk mutual funds as well. This risk is inherent, given the high return potential of mutual funds in the long run. Investing by SIP mode mitigates the volatility factor to some extent by spreading the investment tenure.
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PPF is a risk-free investment and is guaranteed by the Indian Government. Is PPF a good investment depends on your goals. It is a government-backed safe savings avenue. The money deposited in a PPF account is utilised by the Government for its budgetary purposes and interest is deposited by the Government as well. There is hence less risk of default in case of PPF. Given the relatively low risk, the returns are stable. |
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Lock-in-Period |
Most mutual funds, except close-ended funds, do not have a lock in period. The investor has the option to exit the investment scheme at any point of time. | PPF has a mandatory lock in period of 15 years. |
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Diversification |
Mutual Fund offers diversification benefit. Thus, one’s portfolio can include various types of asset classes-equity, fixed income instruments, money market securities etc (equity, hybrid, debt funds) | PPF being a safe, low risk instrument, invests predominantly in fixed income products. |
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Pre-Mature Closure |
Certain mutual funds have a lock in period. For example, ELSS (Equity linked savings scheme) has a lock in period of 3 years.
Even in this case, an investor can completely stop SIP payments but will not be allowed to withdraw the balance before 3 years. |
Premature closure of the PPF account is permitted only under the following circumstances with a 1% lower return:
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* Returns from PPF vs Mutual Funds
| Public Provident Fund Historical returns | |
| Period | Rate of return |
| January – March, 2019 | 8.00% |
| October – December, 2018 | 8.00% |
| July – September, 2018 | 7.60% |
| April – June, 2018 | 7.60% |
| January – March, 2018 | 7.60% |
| October – December, 2017 | 7.80% |
| July – September, 2017 | 7.80% |
| April – June, 2017 | 7.90% |
| January – March , 2017 | 8.00% |
| October – December, 2016 | 8.10% |
| July – September, 2016 | 8.10% |
| April – June, 2016 | 8.10% |
| April 2015 – March 2016 | 8.70% |
| April 2014 – March 2015 | 8.70% |
| April 2013 – March 2014 | 8.70% |
| Source: National Savings Institute, Paisabazaar | |
** The tax treatment of Mutual Funds:
| Kind of scheme | Features | Short Term Capital Gains Tax | Long Term Capital Gains Tax |
| Equity-oriented schemes | Tenure of holding | Up to 12 months | More than 12 months |
| Rate of tax | 15% | 10%*** | |
| Debt oriented schemes | Tenure of holding | Up to 36 months | More than 36 months |
| Rate of tax | Income Tax Slabs | 20% after indexation | |
| ***Long-term capital gains on equity oriented mutual funds are exempt up to an amount of Rs. 1 lakh per annum. If one’s long-term capital gain in FY 2018-19 is Rs 1.5 lakh, only Rs. 50,000 will be liable to tax as LTCG. | |||
| In case of SIPs, the taxation of mutual fund gains is computed based on the ‘First-in-First-out’ (FIFO) principle. Units which are purchased initially are assumed to be redeemed first when one makes a redemption request. Thus the gains are taxed as per sequence. | |||
| An equity oriented mutual fund is that in which more than 65% of the portfolio is allocated towards investment in equities | |||
| Balanced or hybrid funds are generally considered as equity oriented | |||
Your Choice
The choice between PPF and Mutual Fund depends on the investment purposes or investors’ goals. One is a market-linked product while the other functions more like a savings scheme. While PPF offers stability in returns and best suited for investors’ with low-risk appetite.
On the other hand, mutual fund houses makes investment across categories, including equities, debt and bonds including Government bonds. Therefore, it provides the scope for higher returns, but the risk is also higher as it is market linked.
Hence, while you plan to make your investments in any of the options mentioned above, ensure to use an online Calculator. For instance, you can use a PPF Calculator to compute your returns on PPF investment. In a matter of seconds, you will get the amount displayed on your screen. It is an easy hack to see what 'x' amount you need to generate 'y' returns.
Happy Investing!
Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory.