PPF vs Mutual Funds: Which is better? How to invest?

  • Akarshita Yaji
  • Jul 27 2021
  • 7 minutes
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The financial market has a number of instruments through which steady returns can be generated. Two such long-term instruments are the Public Provident Fund and Mutual Funds. Find out which of the two suits your needs more!

What are Mutual funds?

Mutual Funds are professionally run investment pools that allocate money into financial instruments such as government securities, gold, shares, bonds, money market instruments, and so on. These funds are run by Asset Management Companies or AMCs.Based on the risk appetite of the investor, mutual funds are classified as debt-oriented, equity-oriented, or hybrid schemes.

The investment in these funds can be done in a lump sum or through Systematic Investment Plans (SIPs).Investing through the SIP mode mitigates the volatility factor by spreading the investment tenure.

These funds offer the benefit of diversifying one’s portfolio across different asset classes ranging from debt to equity to fixed income instruments.

Tax treatment of mutual funds 

Kind of schemeEquity orientedDebt oriented
Short term capital gains tax (up to 12 months)15%Based on income tax slabs
Long term capital gains tax (up to 36 months)10% (exempt up to an amount of Rs. 1 lakh per annum)20% post indexation 

The tax is levied on the maturity amount.

What is Public Provident Fund?

Public Provident Fund is classified as a long-term savings avenue that is operated by the Government of India with the purpose of instilling the discipline of saving.. The money invested in a PPF is channelized into fixed-income securities. The risk involved is low and the returns are guaranteed. It generates a fixed rate of return and ensures income stability for the investor.

It comes with a lock-in period of 15 years and can be renewed for a 5 year period thereafter. 

Tax treatment of Public Provident Fund

Public Provident Fund is one of those instruments that comes under the Exempt-Exempt-Exempt category which means that the contribution, the interest earned and the amount redeemed on maturity is all exempt from Income Tax which makes it a great instrument for tax saving and long term risk free wealth building.

Comparison Between Public Provident Fund and Mutual Funds

Basis Public Provident FundMutual Fund
Nature of investmentDebt instrument which has the rate fixed by the government.Market-linked instrument and depends on the performance of the underlying asset.
Risk involved Suitable for investors with a low-risk appetiteSuitable for investors with a high-risk appetite
Returns Assured returnsReturns are subject to market volatility, the relative performance of the fund, the expertise of the fund manager, etc.
Purpose or rationaleAccumulating savings, getting a moderate rate of interest, and generating tax benefits.Generate returns to attain the investment goals of the investors based on their risk appetite.
Tenure Has a lock-in period of 15 years and can be renewed for 5 years thereafter.Depends on the investor. Some funds have lock-in periods such as ELSS.
Tax treatment PPFs are EEE i.e. exempt at all stages of the investment. These are not taxable, however, only up to a limit of Rs. 1,50,000 under Section 80C of the Income Tax Act.Tax treatment depends on the scheme that has been invested in.
Liquidity Low degree of liquidity. Withdrawal is permitted only from the seventh year.High degree of liquidity, so much so, that the investment can be for a period of just a few days. Some mutual funds charge an exit load if the units are redeemed within a specific period of time.
Portfolio Investment is into fixed-income products.Diversified into various asset classes namely, equity, cash, debt, fixed income assets, foreign equity, etc.
Premature closureIs permitted for exceptional circumstances with a 1% deduction in the return.An exit load will have to be paid in certain circumstances.

How to invest in  Public Provident Fund?

One must fulfill the eligibility criteria mentioned below before opening a PPF account – 

  1. One must be an Indian citizen.
  2. Minors can open a PPF account provided that it is operated by their parents.
  3. NRIs cannot open PPF accounts. However, if one already exists then it can continue till the completion of tenure.

The PPF account can be opened in the Post Office or in a bank that provides facilities for the same.

KYC documents verifying the identity of an individual, PAN card, Address proof, Nominee Declaration form, and passport size photographs have to be provided at the time of activation of the account.

The process for opening an account can be done online and offline. 

  1. Offline procedure – involves depositing the amount by cash, cheque or demand draft along with the PPF deposit challan.
  2. Online procedure – the fund transfer can be affected with the help of net-banking or mobile banking or a third party transfer (in case the accounts are in different banks).

How to invest in Mutual Funds?

Prior to investing in mutual funds, the following considerations must be deliberated over – 

  1. What is the investment goal for which this mutual fund is being used?
  2. What is the kind of mutual fund that the money must be invested into?
  3. What must the portfolio ideally contain? What are the asset classes and investment style that must constitute the fund?
  4. What mode of investing must be resorted to – SIP or lump sum payments?
  5. Have the KYC procedures been completed?
  6. Does your bank offer a net banking facility? If so, has it been activated for your account?

Once the investor has clarity in all the questions mentioned above, the process of making the investment will get completed in a matter of a few minutes.

The KYC procedure can be completed at a KYC Registration Agency (KRA) by filling in the registration form and uploading self-attested documents.

One can invest in mutual funds through direct or regular plans. It is good to know the difference between the two before investing. You can easily invest in direct mutual funds through the Finity app based on smart recommendations customized to your needs.  And yes, you don’t need a Demat account to invest in mutual funds.

PPF vs Mutual Funds – which is Better?

There is no standard answer for this question and is entirely dependent on one’s risk appetite, the investment goal, turn-around time for the investment, the liquidity required, etc. It is best to factor in all the considerations before making a choice as to where to invest.

Here are some pointers as to what must be the basis for Investment:

  • The basic rule for making any investment is to see that the trade off between risk and return is worth it.
  • The investment is to be made keeping the investment goal in mind, which would involve tax benefits, generating a specific amount for a specific event or purpose, beating market returns etc.
  • It is also useful to keep in mind that historical data suggests that a 15 year mutual fund SIP can offer nearly 1.5 times the returns that a PPF will provide for the same time period, with the additional benefit of liquidity and a diversified portfolio.

Conclusion

Always invest in products that you understand and are in line with your risk profile. You could also have a combination of various assets in your portfolio to balance your portfolio and get you decent returns, irrespective of the economic conditions. 

FAQs

  1. Do PPFs allow lump sum investments?
    Yes, you can invest a total of Rs. 1.5 Lakh per annum in a PPF scheme. 
  1. Can you withdraw your funds from a PPF before maturity?
    Yes, once six years from your first investment have passed, you can make partial withdrawals.
  1. Are there risks associated with SIPs?
    As SIPs do allow you to invest in mutual funds, there are some risks associated with these investments. 
  1. Which is better – SIP or PPFs?
    It really depends on your risk appetite (which means the amount of risk you are comfortable taking). If you want to invest in a scheme with low risk, then PPFs are better for you. If you don’t mind a certain degree of risk, then mutual funds are better for you. 
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