“Investors should always keep in mind that the most important metric is not the returns achieved but the returns weighed against the risks incurred.

Ultimately, nothing should be more important to investors than the ability to sleep soundly at night”- Seth Klarman

Nowadays, investors have a plethora of investment options to choose from, which can suit a wide range of investment goals, be it beating the market returns, low risk, liquidity focussed instruments or tax benefits. The thumb rule is that every investment option invariably involves a trade off between risk and return.

Public Provident Fund (PPF) and Mutual Fund (MFs) are two such investment options available to investors in India. 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

It is operated by an asset management company(AMC). Mutual funds are broadly divided into equity oriented, debt oriented or hybrid schemes, based on the risk appetite of the investor. The most popular method of investing in Mutual funds is Systematic investment plan (SIP). Under a SIP, one can invest a fixed amount on a regular basis in the Mutual fund scheme.

ppf vs mutual funds

Public Provident Fund is a long-term scheme operated and guaranteed by the Central Government with the idea of instilling savings culture amongst citizens. PPF invests predominantly in fixed income securities that generate a fixed rate of return and ensure income stability. Thus by using a PPF calculator, one can compute the expected returns based on the annual investment amount.

While both instruments have their pros and cons, we shall compare the features to get a better understanding of what works best in which scenario:

Comparison Between Mutual Fund and Public Provident Fund

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.

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.

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.

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.

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.

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 percent of the balance in the form of loan.

Withdrawal is permitted from the seventh year onwards. PPF deposits have a mandatory lock-in period of 15 years.

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.

Risk/Safety

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.

 

PPF is a risk-free investment and is guaranteed by the Indian Government. 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.

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.

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.

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:

  • Account should have been held for 5 years.
  • Amount is urgently required for medical treatment for life-threatening illness.
  • Other conditions as specified.

* Returns from PPF and 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
Returns From Some Mutual Funds
Fund Name 1Y 3Y 5Y Expense Ratio Turnover Ratio Category Risk
Mirae Asset Large Cap Fund - Direct - Growth 12.89% 17.4% 15.95% 0.64% 22% Equity
(Large Cap)
Moderately High
Axis Bluechip Fund - Direct - Growth 11.98% 17.66% 13.65% 0.87% 41% Equity
(Large Cap)
Moderately High
L&T Midcap Fund - Direct - Growth -3.16% 14.37% 16.47% 0.92% 19% Equity
(Mid Cap)
High
HDFC Small Cap Fund - Direct - Growth -2.92% 17.39% 16.46% 0.84% 37% Equity
(Small Cap)
Moderately High
Reliance Low Duration Fund - Direct - Growth 6.69% 7.18% 7.88% 0.29% NA Debt
(Low Duration)
Moderately Low
Aditya Birla Sun Life Savings Fund - Direct - Growth 8.67% 8.08% 8.52% 0.23% NA Debt
(Ultra Short Duration)
Moderately Low
Reliance Gilt Securities Fund - Direct - Growth 15.05% 10.97% 11.74% 0.69% NA Debt
(Gilt)
Moderate

** 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

Here is the PPF and mutual fund SIP and lumpsum calculators so that you can have an idea of the returns.

Conclusion

In conclusion, mutual funds will be more beneficial to one’s portfolio, considering the above factors. One can avail tax benefit from both i.e. PPF as well as ELSS category of mutual funds under section 80C of the Income Tax Act, 1961.

However, mutual funds provide you the additional benefit of diversification.

Happy Investing!

Disclaimer: The views expressed in this post are that of the author and not those of Groww