Mutual Funds Vs PPF: Which one to choose?

Investors have a wealth of options to choose from to meet their specific investment objectives, whether they are outperforming the market, seeking low-risk, liquidity-focused instruments, or seeking tax advantages. Investors in India have two such investing options: Public Provident Fund (PPF) and Mutual Fund (MF) However, the two products are not similar because they fulfill distinct functions. Let’s learn more about it!

Mutual Funds Vs PPF

Safety

PPF is a government-sponsored savings vehicle. The government uses the money put in PPF, and interest is paid by the government as well. As a result, there is almost no risk of default.

Mutual funds, on the other hand, are vulnerable to market risks. The value of equities funds swings virtually daily due to price changes in the stocks held by the fund. Debt funds’ values fluctuate in response to changes in bond prices.

Mutual funds, on the other hand, have a stronger long-term growth potential. Volatility is the cost that investors must pay to unlock long-term growth potential. Furthermore, SIP investments in mutual funds minimize market risk and volatility by spreading your investment across time, although the risk is not completely eliminated.

Investment type

AMCs extend mutual fund schemes by designing numerous types of MF schemes with diverse portfolio mixes based on the risk profile of the investor. The corpus invests in financial securities to create returns in order to meet the investors’ investment objectives.
PPF is a popular savings option offered by the Government of India that aims to accumulate resources to build a corpus while offering a modest rate of interest and tax benefits.

Return on Investment (ROI)

The performance of the underlying assets determines the return delivered by each mutual fund strategy. Mutual fund returns are often market-linked. Thus, market performance, as well as the fund manager’s strategy and asset allocation in each asset class, have an impact on MF returns. PPF returns are calculated on an annual basis.

The rates range between 8% and 10% per year. The rate is subject to vary in accordance with government policies. Every quarter, the rate is determined. The government sets and guarantees the returns on PPF. As a result, there is no danger of losing one’s capital investment.

Investment Rationale

The investment purpose of a mutual fund is to aggregate each individual investor’s money and invest the total amount in a financial instrument to achieve greater returns.

The rationale is to attain short-term goals (finance a project). The primary purpose of a PPF is to build a long-term savings corpus over a 15-year investing period. vacation), medium-term (finance children’s education), and long-term (retirement planning) goals of the investor, based on risk tolerance.

Tax Benefit

The tax treatment of mutual funds is determined by the type of scheme and the time period of investment.

PPF investments are tax-free up to a ceiling of Rs 1,50,000 per fiscal year under Section 80C of the Income Tax Act of 1961. The interest on the PPF is also tax-free, but it must be recorded on the annual income tax return. The PPF corpus amount is likewise tax-free at maturity. In other words, as an investment vehicle, PPF has a one-of-a-kind ‘exempt, exempt, exempt’ tax treatment.

Maturity Period

Mutual funds do not have a set holding period. Investors have the option of exiting by selling their mutual fund units. Depending on their risk tolerance, they can retain the MF scheme for a short or lengthy amount of time.

The PPF has a fixed investment period of 15 years. When the PPF reaches maturity, it can be renewed in 5-year increments.

Liquidity

Mutual funds provide a high level of liquidity. Even for a single day, one can remain invested. Particular mutual fund houses charge an exit load if you redeem your mutual fund units within a certain time frame. Closed-ended funds with an investment duration of 3-4 years can be redeemed only when the term expires. The lock-in period for ELSS or tax-saving funds is three years.

PPFs are long-term deposits with a low level of liquidity. At the end of the third year, the subscriber can borrow 25% of the remaining sum. Withdrawal is only permitted after the seventh year for extraordinary circumstances. Because PPF deposits are required to be locked in for 15 years, mutual funds are more liquid in this comparison. A loan can be obtained against PPF deposits accumulated between the third and sixth years of account opening. A partial PPF withdrawal is also possible after 5 years from the end of the year in which the account was opened.

Lock-In Period

Except for closed-ended funds, most mutual funds do not have a lock-in term. The investor has the ability to withdraw from the investment scheme at any time.

The mandatory lock-in time for PPF is 15 years.

Diversification

Mutual funds provide diversification. As a result, one’s portfolio can incorporate a variety of asset classes, such as stock, fixed-income instruments, money market securities, and so on (equity, hybrid, and debt funds)

PPF invests mostly in fixed-income products because it is a safe, low-risk investment.

Pre-Mature Closure

A lock-in period exists for certain mutual funds. For example, an ELSS (Equity linked savings system) has a three-year lock-in period.
Even in this circumstance, an investor can suspend SIP payments completely but will not be able to withdraw the balance before three years.

Premature closing of a PPF account is permissible only under the following conditions, with a 1% reduced return:

• The account should have been held for at least five years
• The amount is urgently required for medical treatment for a life-threatening illness.

Both investment options have their own merits and suit different financial goals and risk preferences. Mutual Funds offer the potential for higher returns but come with market-related risks. On the other hand, PPF provides guaranteed returns but with a lower rate of growth. Like this post? Don’t forget to check out our other short stories in our Quick Read section