SIP, or Systematic Investment Plan – is a well-established investment method used in mutual funds. This method involves investing a fixed amount of money on a regular basis, usually monthly, in a mutual fund. By doing so, the investment is spread over a period of time, thereby averaging out the purchase price and minimizing the potential risk of investing at a market peak.
Moreover, SIPs offer an additional benefit by allowing investors to purchase more mutual fund units when the price of the fund drops, thereby maximizing the return on investment. In essence, SIPs provide a disciplined and structured approach to investing, which can be highly beneficial for investors looking to build a diversified portfolio with the potential for long-term growth.
PPF, or Public Provident Fund – is a government-backed savings scheme that offers a fixed rate of return, which is determined by the government on a quarterly basis. This scheme is designed to provide a secure investment option for individuals, especially those who seek a long-term investment plan.
One can open a PPF account with a post office or any of the major banks in the country. The current interest rate for the first quarter (April-June) of FY 2023-2024 has been set at 7.1%, ensuring that the investment in PPF remains a lucrative option for investors seeking a stable and risk-free return on their investment. It is worth noting that PPF accounts have a tenure of 15 years, and the interest rate is compounded annually, making it an attractive investment option for individuals looking for a long-term savings scheme.
SIP vs PPF: A Comparison
1) Safety
PPF, or Public Provident Fund, is a savings instrument that is supported by the Government of India. The funds invested in PPF are utilized by the government, and the interest on these funds is also paid by the government. This provides a high level of assurance to investors, as the government’s backing ensures that there is virtually no possibility of default.
The PPF is considered one of the most reliable investment options in India due to the government’s guaranteed backing. Moreover, the interest rate for PPF is fixed by the government and is typically higher than other comparable fixed-income investment options. This, coupled with the tax benefits provided under Section 80C of the Income Tax Act, makes PPF an attractive investment avenue for individuals seeking a safe and stable investment option
Investments in mutual funds are subject to market risks. The value of mutual fund units, particularly in equity funds, tends to fluctuate frequently due to the variations in the prices of the stocks held by the fund. Similarly, debt funds may also experience changes in value due to fluctuations in bond prices.
The inherent risk associated with mutual funds is largely driven by the market conditions and the performance of the underlying assets. While there are various strategies that fund managers employ to mitigate risks, the possibility of losses due to market fluctuations cannot be entirely eliminated. Therefore, investors are advised to carefully evaluate their investment objectives, risk tolerance, and the market conditions before investing in mutual funds.
2) Returns
The returns on PPF are known to be fixed and guaranteed by the government, which makes it a secure investment option for individuals seeking stable returns. The interest rate on PPF is determined by the government and is set on a quarterly basis. In the past, the interest rates on PPF have tended to fluctuate around 8% per annum.
Mutual funds provide returns that are market-linked, meaning they are subject to fluctuations based on market conditions and the performance of the fund manager. The returns on mutual funds are not guaranteed, and investors are exposed to the risk of market fluctuations and underperformance.
3) Liquidity
PPF deposits have a lock-in period of 15 years, which means that investors are required to keep their investments in the account for at least 15 years. This is in contrast to open-ended mutual funds, where investors can redeem their investments on any business day.
The flexibility of redeeming mutual funds as per the investor’s requirement makes them a more liquid investment option than PPF deposits. Mutual funds provide investors with the option to exit the investment at any time, subject to market conditions and any applicable fees or charges. This allows investors to meet their liquidity needs and access their investment returns more easily
4) Taxation
Investments made in PPF accounts are eligible for a tax deduction of up to Rs 1.5 lakh per annum under Section 80C of the Income Tax Act, 1961. In addition to the tax deduction, the interest earned on the PPF is also exempt from tax. However, the interest earned must be declared in the annual income tax return. Furthermore, the maturity amount of PPF is also exempt from tax, making it a tax-efficient investment option for individuals.
The tax treatment of PPF is commonly referred to as ‘exempt, exempt, exempt’ (EEE), which means that the investment amount, the interest earned, and the maturity amount are all exempt from tax. This makes PPF a popular investment option for individuals seeking to save on taxes while enjoying the benefits of a secure, long-term investment
The returns on mutual funds are subject to taxation based on the type of mutual fund scheme and the investment tenure. The tax treatment for equity mutual funds and debt mutual funds differs based on the holding period and the applicable tax rates.
Investors can also benefit from tax deductions by investing in Equity-Linked Saving Schemes (ELSS) funds, a specific category of mutual funds. Investments made in ELSS funds are eligible for a tax deduction of up to Rs 1.5 lakh per annum under Section 80C of the Income Tax Act, 1961. However, this tax benefit is not available for other categories of mutual funds.
Also, read it – Equity funds vs Debt funds
What Should You Choose?
It is essential to note that comparing a market-linked product with a fixed-income one can be challenging. PPF investments are suitable for individuals who are entirely risk-averse. On the other hand, mutual funds can offer higher returns to investors willing to take a moderate amount of risk. Moreover, the risk associated with mutual funds can be further minimized by investing through a long-term SIP route.
PPF investment scores lower in terms of liquidity due to the mandatory 15-year lock-in period. However, investors can avail of tax benefits under section 80C of the Income Tax Act, 1961, for both the PPF and Equity-Linked Saving Schemes (ELSS) category of mutual funds. The only advantage in the case of PPF tax treatment is that the returns and maturity amount are tax-exempt, unlike mutual funds.
Investors should evaluate their risk appetite, investment goals, and other factors before choosing between PPF and mutual funds. Seeking professional advice can also help make an informed decision.