Mutual Funds vs PPF: Which is better form of investment

When it comes to investing, there are a plethora of options available in the market but two of the most popular ones are Mutual Funds vs PPF (Public Provident Funds). 

Both of these investment options have their own advantages and disadvantages, as an investor, choosing any one of them is a puzzling thing to do.

PPF is like a trusty, government-guarded investment option for your savings, while Mutual Funds are like a dynamic team of financial experts running your investment stuff like shares, bonds, money market instruments, etc.

So, today, let’s enter the world of PPF and Mutual Funds, to explore the similarity and difference between PPF and mutual fund, to decide the right option for you.

What is the Public Provident Fund — PPF?

What is the Public Provident Fund

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PPF, or Public Provident Fund, is a smart savings scheme by the Indian government introduced in 1968. It aims to encourage people to save money wisely and provide a secure investment avenue.

Here’s how it works –

  • You can put in up to Rs. 1.5 lakh per year and earn a fixed interest rate, currently at 7.10% per annum. The government sets this rate, changing it every quarter. 
  • Your money is locked in for 15 years, but the good news is that your investment is tax-deductible under Section 80C of the Income Tax Act.

Even better, the interest you earn and the maturity amount are both tax-free. It’s like growing your money in a safe box that shields it from taxes.

No wonder PPF is a popular choice in India, especially for those seeking a secure, long-term investment with tax benefits.

Read Also: Top 10 Stock Chart Patterns All Traders Should Know

What Are Mutual Funds?

What Are Mutual Funds?

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On the other hand, Mutual Funds are like teamwork for your money – managed by professionals called Asset Management Companies (AMCs) who gather money from different folks like you. These professionals then further dive into various investments like stocks, bonds, and more.

The profits you make depend on how well these investments do. Mutual Funds offer different plans, like a menu of options, to match your goals and how much risk you’re okay with. It’s like having a squad of experts handling your investments, helping you grow your money smartly.

Difference Between PPF And Mutual Fund

To know the better form of investment between the two types of investments, it’s essential to compare ppf and mutual fund –

Safety

PPF, or Public Provident Fund, is a savings tool supported by the government, making it highly safe. The money you deposit in PPF is used by the government, and they also pay interest on it. This virtually eliminates the risk of default.

In contrast, mutual funds involve market risks. The value of equity funds changes almost daily due to fluctuations in stock prices. Debt funds are also affected by changes in bond prices.

Despite the daily ups and downs, mutual funds offer higher growth potential in the long term. Investors pay for this potential growth with the volatility they experience.

Investing in mutual funds through SIP (Systematic Investment Plan) can help reduce market risk by spreading your investment over time, but it doesn’t eliminate the risk entirely.

Risk

Risk management is essential in investing for financial goals.

PPF stands out as a low-risk choice, government-backed with guaranteed returns. In contrast, Mutual Funds entail higher risk due to market dependency.

Aligning investments with risk tolerance and diversifying the portfolio across asset classes aids risk management. It’s vital for investors to weigh risk and return potential for informed decision-making in achieving financial objectives.

Returns

PPF provides fixed and government-guaranteed returns, with the exact rate set every quarter. Historically, rates have hovered around 8% per annum.

On the flip side, mutual fund returns are linked to the market. They vary based on market conditions and the fund manager’s performance. 

Liquidity

PPF, or Public Provident Fund, locks your money for 15 years. On the flip side, mutual funds (open-ended) let you redeem your investment on any business day. This flexibility makes mutual funds more liquid than PPF deposits.

While PPF allows loans against your deposits from the 3rd to 6th year, partial withdrawals are allowed after the 6th financial year. Specific banks may have variations in withdrawal policies. Mutual funds also allow loans, but they might be costlier due to higher interest rates and processing fees.

Remember, mutual funds may charge an exit load if you redeem too early, typically within the first year. Some ‘close-ended funds’ have a fixed tenure, restricting redemption before the term ends.

Expense Ratio

The Expense Ratio is a fee charged from Mutual Funds for managing your money. It’s different for each fund and can impact how much you earn. PPF, unlike Mutual Funds, doesn’t have any fees.

Mutual Funds are pro-handled, offering more diversity and potentially higher earnings. But keep an eye on the Expense Ratio to make sure fees don’t eat into your gains.

Flexibility

Flexibility is another important factor to consider when choosing an investment option between mutual funds vs PPF.

PPF locks your money for 15 years with limited withdrawal chances. Mutual Funds are more flexible. You pick the type that suits your goals and risk level.

You decide how much to invest, when, and when to cash out. Just watch out for minimum investment limits in some funds, which might limit your choices.

Taxation

Both mutual funds and PPF provide tax benefits as per Section 80C of the Income Tax Act, 1961. The interest earned on PPF is tax-free, while the returns on Mutual Funds are subject to capital gains tax.

Investing in a PPF account lets you claim a tax deduction of up to Rs 1.5 lakh per year. The interest and maturity amount from PPF are tax-exempt, following the ‘exempt, exempt, exempt’ tax treatment.

Returns on certain mutual funds are taxed based on the scheme and investment tenure. ELSS funds, a specific category, also offer a tax deduction of up to Rs 1.5 lakh per year under Section 80C. However, this benefit doesn’t apply to other mutual fund categories. 

Investors should choose an investment option that offers better tax benefits based on their financial situation and investment goals.

The taxation of mutual funds is as follows – 

Type of SchemeParticularsShort Term Capital Gains TaxLong Term Capital Gains Tax
Equity-oriented schemesHolding PeriodUp to 12 monthsMore than 12 months
Tax Rate15%10%*
Non-equity oriented schemesHolding PeriodUp to 36 monthsMore than 36 months
Tax RateIncome Tax Slab Rate of Investor20% after indexation

For SIPs, mutual fund gains are taxed following the ‘First-in-First-out’ (FIFO) principle. This means that the units purchased first are considered redeemed first when you submit a redemption request, and the gains are taxed accordingly.

Who Should Invest In Mutual Funds?

If you’re looking for a mix of returns from the market and want your investment to be handled by experts, Mutual Funds might be your go-to. They’re like a team effort where your money joins others to invest in different things like stocks, bonds, and more.

It’s suitable for – 

  • Return Seekers – those who want to earn more based on market performance.
  • Diversifiers – If you want to spread your money across different types of investments.
  • Limited Funds – If you don’t have a lot to invest individually.
  • Medium to Long Term – If you’re thinking about the future.

Things to Know before getting into Mutual Funds – 

  • Understand the cost of managing the fund.
  • Know the charges when you take your money out.
  • Check how the fund has done, but don’t rely only on that.

Read More: 7 Best Books For Stock Market Beginners In India [2024]

Who Should Invest In PPF (Public Provident Fund)?

For those who like a more laid-back, secure approach, the Public Provident Fund (PPF) might be the right choice. It’s like a long-term commitment, where your money stays locked in for 15 years, and you get fixed returns.

It’s suitable for – 

  • Risk-Avoiders – If you don’t like taking too many risks.
  • Tax Savers – If you want some tax benefits.
  • Retirement Planners – Great for building a retirement fund.
  • Fixed Income Fans – If you prefer stability.

Things to Know before getting into PPF – 

  • There’s a limit on how much you can invest each year.
  • Your money stays locked for 15 years.
  • The return is fixed and set by the government.
  • You can save on taxes.
  • Know the rules if you need to take money out.

Which Is Better – Mutual Funds vs PPF?

After we compare PPF and mutual funds, it’s now time to know which is better. The simple answer is – it depends on your goals and how much risk you’re okay with.

  • If you want a steady, predictable ride, PPF might be your go-to. 
  • But if you’re up for a bit of adventure and the chance for higher returns, Mutual Funds could be your thing.

But, remember, before getting into the investing option to choose between mutual funds vs PPF, you need to get to know the basics of both types of investing. Learn about PPF, Mutual Funds, and all about investing, with Upmarket Academy. They’ve got free courses, live sessions, webinars, and all the help you need.

So, start learning now and begin your investing journey!

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