As an investor, one of the most difficult decisions is determining the investment vehicles that you want to opt for to achieve your financial goals. For a new investor, this can be overwhelming due to the sheer number of options available. Should you invest in shares? Or, opt for mutual funds? Isn’t PPF very safe? What are ULIPs? The questions are endless. In this article, we will try to throw some light on three major investment options, Mutual Funds, ULIPs, and PPF and offer a comparative analysis to help you make an informed decision.

Mutual Fund

A preferred mode of investment for most Indians, a Mutual Fund is a professionally managed investment vehicle where a fund house pools money from different investors with common financial goals. It invests these funds in securities to achieve the overall investment objective of the fund. An experienced fund manager monitors and manages the corpus while making necessary changes to keep the returns positive. 

Mutual Funds can be broadly classified into three types:

  1. Equity Funds – where the fund primarily invests in equity or equity-related instruments. These funds are usually higher risk funds and also tend to offer better returns than other types of funds.
  2. Debt Funds – where the fund primarily invests in debt securities or money market instruments. These less risky than equity funds but the returns are also lower.
  3. Balanced Funds – where the fund invests in both equity and debt instruments. They tend to have moderate risk associated with them and offer moderate returns.

Equity Linked Savings Scheme or ELSS is a special type of equity fund which offers tax benefits under Section 80C of the Income Tax Act, 1961. These schemes have a mandatory lock-in period of three years.

Mutual Funds also offer several facilities and tools to help investors. Some of these are:

  • SIP or a Systematic Investment Plan – where the investor can invest a fixed amount of money in the mutual fund scheme regularly. So, you can invest Rs.1000 in a mutual fund scheme of your choice every month. This helps you save and invest at the same time.
  • SWP or a Systematic Withdrawal Plan – where the investor can withdraw a fixed amount of money from his investments regularly. He can also choose to withdraw only the gains on a regular basis. This can help you create a secondary source of regular income.
  • STP or a Systematic Transfer Plan – where the investor can transfer funds from one scheme to another within the same fund house. This is a great tool to hedge your losses or pocket the gains without withdrawing the funds.

Public Provident Fund or PPF

In 1968, the Government of India established a long-term savings option to help people get into the habit of saving for their life after retirement. This scheme was called the Public Provident Fund or PPF. Under this scheme, you need to deposit a minimum of Rs.500 and a maximum of Rs.1.5 lakh every year in your PPF account. This account has a lock-in period of 15 years. In Q2 of the financial year 2019-20, the rate of interest offered by the PPF scheme was 7.9%. 

Since this scheme is backed by the Government of India, your capital is at no risk. Also, investing in PPF offers tax benefits under Section 80C of the Income Tax Act, 1961. This scheme falls under the EEE (Exempt-Exempt-Exempt) category. This means that your investment is exempt from tax at the time of investment, redemption, and the interest earned is exempt from tax too.

Unit Linked Insurance Plan (ULIP)

A ULIP is a unique investment vehicle which merges the idea of investment and insurance. ULIPs offer you a life cover while providing an opportunity to earn returns on your investment too. When you invest in a ULIP, the premium amount is divided into two parts – the first part is used as the premium payment for the insurance policy while the second part is invested in Mutual Funds. There are different categories of ULIPs based on the investment options offered by them. You can have a Balanced High Equity ULIP which focuses primarily on equity investments, or Balanced High Debt ULIP which focuses on debt investments.

Further, your investment in ULIPs offers tax benefits under Section 80C of the Income Tax Act, 1961.

Mutual Funds vs. ULIPs vs. PPF

Here is the comparison between these three investment vehicles:

Factor: Investment Focus
Mutual Fund Wealth creation or regular income
ULIP Insurance and wealth generation
PPF Post-retirement income

 

Factor: Lock-In Period
Mutual Fund Open-ended schemes have no lock-in. Closed-ended schemes have a maturity period. Also, ELSS schemes have a lock-in of 3 years.
ULIP Lock-in period of 5 years
PPF Mandatory lock-in of 15 years

 

Factor: How much can you invest?
Mutual Fund You can start investing with a SIP or Rs.500. There is no upper limit.
ULIP Depends on the plan. Also, the life cover depends on the premium amount. Hence, the minimum amount is higher than mutual funds.
PPF You need to invest a minimum of Rs.500 and a maximum of Rs.1.5 lakh in a financial year

 

Factor: Charges
Mutual Fund Annual Fund Management Charges (Expense Ratio) and Exit Load (in some cases)
ULIP Premium allocation charges, mortality charges, administration charges, and fund management charges
PPF One-time account opening charges of Rs.100

 

Factor: Tax Benefits
Mutual Fund For the sake of comparison, we will talk about ELSS schemes. The amount invested in these schemes can be deducted from your taxable income up to a limit of Rs.1.5 lakh in a financial year. This benefit is available under Section 80C of the Income Tax Act, 1961.
ULIP The invested premium of up to Rs.1.5 lakh per year can be deducted from your taxable income under Section 80C of the Income Tax Act, 1961.
PPF The amount deposited in the PPF account in one financial year can be deducted from your taxable income subject to a limit of Rs.1.5 lakh per year. This is under Section 80C of the Income Tax Act, 1961.

 

Factor: Withdrawals/Redemptions
Mutual Fund Open-ended schemes: you can redeem on any working day

Closed-ended schemes: you can trade the units on the stock exchange

ELSS: you can withdraw only after three years. Premature withdrawals are not permitted.

ULIP Partial withdrawal allowed only after the completion of the lock-in period
PPF Partial withdrawal allowed from the 7th year onwards. Complete withdrawal only after the completion of 15 years.

 

Factor: Investment Risk
Mutual Fund Depends on the type of scheme. Equity schemes have higher risk as compared to balanced and debt schemes.
ULIP Depends on the balance of equity and debt in your investment portfolio
PPF No risk as it is backed by the Central Government

 

Summing Up

I hope that this article helped you understand the difference between Mutual Funds, ULIPs, and PPF investments. In case you need further assistance, talk to an investment advisor before making your financial plan. Remember: Invest Wisely.

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