Public Provident Funds (PPF) and Mutual Funds are popular investment options. Both have unique features, benefits, and potential drawbacks. With this blog, explore the differences between PPF and Mutual fund investment options and learn which best suits your financial goals.
What is PPF?
The Public Provident Fund (PPF) is a government-backed savings scheme in India designed to provide long-term financial security to individuals. Here are some key features:
PPF is considered one of the safest investment options as a government-backed scheme.
The government determines the interest rate on PPF, which is revised quarterly. Historically, it has ranged between 7% and 8%.
The minimum period for a PPF investment is 15 years, which can be extended.
Investments in PPF are eligible for tax deductions under the Income Tax Act. The interest earned and the maturity amount are also tax-free.
What is a Mutual Fund?
Mutual funds are a way to invest money where many investors pool their funds together. This combined money is used to buy stocks, bonds, and other investments. Key features include:
Mutual funds are classified into different types, such as equity, debt, hybrid, and more, with varying appetites for risk and investment goals.
Mutual fund returns are market-linked and can alter based on the performance of the underlying assets. They have the potential to provide higher returns compared to traditional savings instruments.
Mutual funds offer high liquidity, allowing investors to redeem their units anytime (subject to exit load in some cases).
These funds are managed by fund managers who aim to achieve the best possible returns for investors.
Differences Between PPF and Mutual Fund
The table below enlists the difference between the Public Provident Fund (PPF) and mutual funds regarding returns, liquidity, and other vital factors.
| Features | PPF | Mutual Fund |
| Safety | Government-backed, very safe | Market-linked risk varies |
| Returns | Fixed, currently around 7-8% | Variable, potentially higher |
| Tenure | Minimum 15 years | Flexible, can be short or long-term |
| Liquidity | Low, partial withdrawal allowed after 5 years | High, can redeem anytime |
| Tax Benefits | EEE status (Investment, Interest, Maturity amount tax-free) | Tax benefits under Section 80C (ELSS funds), capital gains tax applicable |
Differences in Returns of PPF and Mutual Funds
When comparing returns, it is essential to understand that PPF offers a fixed rate of return, which is currently around 7-8% per annum. The government guarantees this rate, making it a very secure investment.
On the other hand, mutual funds offer market-linked returns, which means they can vary significantly. Historically, equity mutual funds have provided returns of 10-15% per annum, while debt mutual funds have offered around 6-8% per annum. However, these returns are not guaranteed and fluctuate based on market conditions.
Risks Involved with PPF and Mutual Funds
While both PPF and mutual funds offer unique benefits and opportunities for investors, it is crucial to be aware of the risks these funds provide. Awareness of these risks can help you make better choices and manage your portfolio more effectively. This section will explore the dangers tied to PPF and mutual funds, providing you with a comprehensive understanding of what to expect and how to mitigate these risks.
Risks of PPF
Inflation Risk: While PPF is safe, its returns may not always keep up with inflation, potentially reducing the actual value of your savings over time.
Liquidity Risk: PPF has a long lock-in period of 15 years, limiting your ability to access funds in an emergency. Partial withdrawals are allowed after 5 years, but they come with restrictions.
Interest Rate Risk: The interest rate on PPF is subject to change and is revised quarterly by the government. Future interest rates may be lower than current rates.
Risks of Mutual Funds
Market Risk: These funds are subject to market risks, meaning the value of your investment can fluctuate based on market conditions. This is particularly true for equity funds.
Credit Risk: For mutual funds with debt, there is a risk that the issuers of the underlying securities may default on their payments.
Interest Rate Risk: Regular changes in interest rates can affect the performance. For example, when interest rates increase, the value of existing bonds typically falls.
Liquidity Risk: While mutual funds are generally liquid, certain funds (like real estate funds) might have lower liquidity, making it harder to sell your investment quickly.
Management Risk: A mutual fund’s performance depends on the fund manager’s expertise. Poor portfolio management decisions can lead to lower returns and increased investor risk.
Which One to Choose: PPF or Mutual Fund?
Choosing between PPF and mutual funds depends on financial goals, investment horizon and risk tolerance.
Risk-Averse Investors: If you prefer a safe, government-backed investment with guaranteed returns, PPF is an excellent choice.
Higher Returns: Mutual funds might be more suitable if you are willing to take some risk for potentially higher returns.
Long-Term Goals: PPF is ideal for long-term goals due to its 15-year lock-in period.
Flexibility: Mutual funds offer more flexibility in terms of tenure and liquidity, making them suitable for short-term and long-term goals.
Conclusion
PPF offers secure, government-backed returns suitable for conservative, long-term savers. Mutual funds provide higher return potential and flexibility, which is ideal for those willing to accept market risks for growth. A balanced approach incorporating both can diversify your portfolio and achieve a mix of security and development. By understanding the features and risks, you can make better choices and work towards your financial objectives effectively.
FAQs
Ans: Yes, you can invest in both PPF and mutual funds. Diversifying your investments is a wise strategy as it helps balance safety and growth potential. By investing in both, you can take advantage of the security of PPF and the growth opportunities of mutual funds, thereby creating a more balanced and resilient investment portfolio.
Ans: PPF is considered safer with guaranteed returns, while mutual funds offer the chances for higher returns but come with market risks. The better option depends on your wealth goals and investment horizon. PPF suits conservative investors seeking a secure, long-term investment with tax benefits. Conversely, mutual funds are ideal for those willing to accept some level of risk to achieve higher returns.
Ans: The minimum investment in PPF is ₹500 per year, and the maximum is ₹1.5 lakh per year.
Ans: No, mutual fund returns are market-linked and can vary. They are not guaranteed.
Ans: You can open a PPF account at a bank or post office. You can invest through fund houses, brokers, or online investment platforms for mutual funds. Invest in mutual funds with outperforming returns with Stack Wealth.
Ans: You can borrow against your PPF account between the third and sixth years. You can borrow up to 25% of the balance in your account from two years before the year you apply for the loan.
Ans: Mutual fund investments are subject to capital gains tax. Short-term capital gains (for equity funds held for less than one year) are taxed at 15%, while long-term capital gains (for equity funds held for more than one year) above ₹1 lakh are taxed at 10%. For debt funds, short-term capital gains (held for less than three years) are taxed as per the investor’s income tax slab, and long-term capital gains are taxed at 20% with indexation benefits.
