PPF vs Mutual Fund. Which one is better?

In this article we will discuss about PPF vs Mutual Fund and which one is better for you for long term investment and tax saving purpose. Both are used as long term saving option in India.

What is PPF?

PPF stands for Public Provident Fund, which is a popular long-term savings and investment scheme in India. It is a government-backed scheme that was introduced in 1968 to encourage savings and investment among Indian citizens.

Under the PPF scheme, individuals can open an account with a minimum deposit of Rs. 500 and a maximum of Rs. 1.5 lakh per year. The account has a maturity period of 15 years, which can be extended for an additional five years if desired. The interest rate on PPF is fixed by the government and is currently 7.1% (as of February 2023).

The contributions made towards PPF qualify for tax benefits under Section 80C of the Income Tax Act, and the interest earned is also tax-free. Additionally, withdrawals from the PPF account are also tax-free. PPF is considered a safe investment option as it is backed by the government and offers a guaranteed rate of return. However, it has a long lock-in period of 15 years, during which partial withdrawals are allowed after a certain number of years.

What is Mutual Fund?

A mutual fund is a type of investment vehicle that pools money from multiple investors to invest in a portfolio of financial assets such as stocks, bonds, and other securities. A mutual fund is managed by a professional fund manager who uses the money collected from investors to buy a diversified range of assets.

Investors who purchase units in a mutual fund are effectively buying a portion of the entire portfolio, which is proportionate to their investment. The returns earned by the mutual fund are shared among the investors in proportion to their holdings.

Mutual funds are regulated by the Securities and Exchange Board of India (SEBI) in India and are available in different types, such as equity funds, debt funds, hybrid funds, and more. The returns generated by mutual funds can be affected by various factors, including market conditions, interest rates, and other economic factors.

Mutual funds are popular investment options in India as they offer the potential for higher returns than traditional savings instruments like fixed deposits and PPF, but they also come with market risks. Investors can invest in mutual funds through systematic investment plans (SIPs) or lump sum investments. Additionally, mutual funds also offer tax benefits under certain conditions.

PPF vs Mutual Fund

A Public Provident Fund (PPF) and a Mutual Fund (MF) are both popular investment options in India, but they have some fundamental differences in terms of their features and benefits.

Investment Type

PPF is a government-backed investment scheme that offers a fixed rate of return, whereas mutual funds are investment vehicles that invest in a range of financial instruments like stocks, bonds, and securities.

Returns

PPF offers a guaranteed rate of return, which is currently 7.1% (as of February 2023). In contrast, mutual funds offer variable returns that are dependent on market performance. The returns can be higher or lower than PPF returns.

Liquidity

PPF has a lock-in period of 15 years, during which partial withdrawals are allowed after a certain number of years. In contrast, mutual funds have no lock-in period, and investors can sell their units anytime.

Risk

PPF is considered a safe investment option as it is backed by the government, and the returns are guaranteed. Mutual funds, on the other hand, are subject to market risks and are not guaranteed.

Tax Benefits

Investments in PPF qualify for tax benefits under Section 80C of the Income Tax Act, and the interest earned is also tax-free. Mutual funds also offer tax benefits, but they are subject to market performance and investment tenure.

Why one should invest in PPF?

There are several reasons why one should consider investing in PPF:

1. Guaranteed Returns: PPF offers a guaranteed rate of return that is fixed by the government. The current interest rate on PPF is 7.1% (as of February 2023). The rate of return is reviewed by the government every quarter and is generally higher than other fixed income instruments like fixed deposits.
2. Tax Benefits: Investments in PPF qualify for tax benefits under Section 80C of the Income Tax Act, which allows for a deduction of up to Rs. 1.5 lakh from taxable income. Additionally, the interest earned on the PPF account is also tax-free.
3. Safe Investment: PPF is considered a safe investment option as it is backed by the government and offers a guaranteed rate of return. This makes it an attractive option for risk-averse investors who are looking for a low-risk investment option.
4. Long-term Savings: PPF has a long maturity period of 15 years, which makes it an ideal option for long-term savings. The long lock-in period encourages investors to stay invested for the long term and helps them build a significant corpus over time.
5. Flexibility: While PPF has a lock-in period of 15 years, partial withdrawals are allowed after the fifth year. This provides some flexibility to investors who may need to access their funds in case of an emergency.

In summary, PPF is a good investment option for those looking for a safe and long-term investment option that offers guaranteed returns and tax benefits. However, it is important to note that the rate of return on PPF may not always be higher than other investment options, and it is important to evaluate one’s financial goals and risk appetite before making an investment decision.

Documents requirement for opening PPF account

To open a PPF (Public Provident Fund) account in India, the following documents are generally required:

1. Application Form: A PPF account opening form needs to be filled out and submitted to the bank or post office where you wish to open the account. The form is available online or can be obtained from the bank or post office.
2. Identity Proof: Any of the following documents can be submitted as identity proof – PAN card, Aadhaar card, Voter ID card, Driving License, or Passport.
3. Address Proof: Any of the following documents can be submitted as address proof – Aadhaar card, Voter ID card, Passport, Driving License, or utility bill (electricity, telephone, water bill) not more than 3 months old.
4. Photograph: Two recent passport-sized photographs need to be submitted with the application form.
5. Nomination Form: A nomination form needs to be filled out and submitted along with the application form. The nominee can be any family member.

It is advisable to carry original copies of the documents for verification purposes while submitting the application form. The documents required may vary slightly depending on the specific bank or post office where the PPF account is being opened, and additional documents may be required if the account is being opened for a minor or for a Hindu Undivided Family (HUF).

Why one should invest in Mutual Fund?

Here are some reasons why one should consider investing in mutual funds:

1. Professional Management: Mutual funds are managed by professional fund managers who have expertise in selecting and managing a portfolio of investments. They have access to research and analysis tools that help them make informed investment decisions on behalf of the investors.
2. Diversification: Mutual funds invest in a diversified portfolio of assets, which helps to reduce the risk of loss from any one particular investment. By spreading the investment across various securities, mutual funds help to minimize risk and generate stable returns.
3. Flexibility: Mutual funds offer a variety of investment options, including equity funds, debt funds, hybrid funds, and more. Investors can choose a fund that aligns with their investment objectives and risk appetite.
4. Liquidity: Mutual funds offer liquidity, which means investors can buy and sell units of the fund on any business day. This provides investors with the flexibility to access their funds when needed.
5. Tax Benefits: Certain mutual funds, such as equity-linked savings schemes (ELSS), offer tax benefits under Section 80C of the Income Tax Act. Additionally, long-term capital gains on equity mutual funds are tax-exempt up to Rs. 1 lakh.

In summary, mutual funds offer investors the opportunity to invest in a diversified portfolio of assets managed by professional fund managers. They provide liquidity, flexibility, and potential for higher returns than traditional savings instruments like fixed deposits. However, it is important to evaluate one’s financial goals, risk appetite, and investment horizon before making an investment decision in mutual funds.

What is the historical return on PPF?

The Public Provident Fund (PPF) is a government-backed savings scheme that was introduced in India in 1968. The interest rate on PPF is determined by the government and is subject to periodic revision.

Here is a historical overview of the interest rates on PPF since its inception:

• From 1968 to 1977: The interest rate on PPF was 4.8% per annum.
• From 1977 to 1986: The interest rate on PPF was 8.0% per annum.
• From 1986 to 2000: The interest rate on PPF was 12.0% per annum.
• From 2000 to 2001: The interest rate on PPF was 11.0% per annum.
• From 2001 to 2003: The interest rate on PPF was 9.5% per annum.
• From 2003 to 2011: The interest rate on PPF was in the range of 8.0% to 8.6% per annum.
• From 2011 to 2016: The interest rate on PPF was in the range of 8.0% to 8.7% per annum.
• From 2016 to 2021: The interest rate on PPF was in the range of 7.1% to 8.0% per annum.
• From 2021 to present: The interest rate on PPF is 7.1% per annum.

It’s important to note that the rate of return on PPF is subject to change based on government policies and market conditions. While PPF offers a guaranteed rate of return, the returns may not always be higher than other investment options like mutual funds or equities. It is important to evaluate one’s financial goals and risk appetite before making an investment decision. This will help you to take decision on PPF vs Mutual Fund as your investment option.

What is the historical return on mutual funds?

The historical returns on mutual funds can vary widely depending on the type of fund, the investment strategy, and the market conditions. However, as a general rule, mutual funds that invest in equities have historically offered higher returns over the long term compared to other asset classes like fixed income securities.

Here is a historical overview of the average returns of different categories of mutual funds in India:

1. Equity Funds: Over the last decade (2012-2021), the average annualized return of equity funds in India has been around 12.6%. However, the returns can vary significantly depending on the market conditions and the investment strategy of the fund.
2. Debt Funds: The returns on debt funds are generally lower than equity funds as they invest in fixed income securities. Over the last decade, the average annualized return of debt funds in India has been around 7.2%.
3. Hybrid Funds: Hybrid funds invest in a combination of equities and debt securities. Over the last decade, the average annualized return of hybrid funds in India has been around 9.5%.

It is important to note that past performance is not a guarantee of future returns, and the returns of mutual funds can be affected by various factors like market volatility, economic conditions, and the performance of the underlying assets. It is important to evaluate one’s investment objectives, risk appetite, and investment horizon before making an investment decision in mutual funds. Additionally, investors should carefully study the fund’s track record, investment philosophy, and fund management team before investing in a mutual fund. This will help you to take decision on PPF vs Mutual Fund as your investment option.

Which mutual funds are best for investment?

Choosing the best mutual fund for investment depends on various factors like investment goals, risk tolerance, investment horizon, and personal financial situation. Different mutual funds have different investment objectives, and it is important to choose a fund that aligns with your investment goals and risk appetite. Here are some broad categories of mutual funds that you can consider for investment:

1. Large-Cap Equity Funds: These funds invest in large companies with a proven track record and stable performance. They have the potential for steady returns over the long term.
2. Mid-Cap Equity Funds: These funds invest in mid-sized companies that have the potential for high growth but are relatively more risky than large-cap funds. They have the potential for higher returns over the long term.
3. Small-Cap Equity Funds: These funds invest in small-sized companies that have the potential for high growth but are relatively more risky than large and mid-cap funds. They have the potential for the highest returns over the long term.
4. Index Funds: These funds invest in the same proportion as a particular market index like Nifty or Sensex. They have low expenses and provide returns that closely track the index.
5. Debt Funds: These funds invest in fixed income securities like bonds and debentures. They have the potential for stable returns over the long term, but are relatively less risky than equity funds.
6. Hybrid Funds: These funds invest in a combination of equity and debt securities. They have the potential for balanced returns with relatively lower risk.

It is important to evaluate the past performance, fund manager, investment philosophy, expense ratio, and investment track record of the mutual fund before making an investment decision. It is also important to invest regularly and have a long-term investment horizon to get the most benefit from mutual fund investments. It is always advisable to consult a financial advisor before making any investment decisions. This will help you to take decision on PPF vs Mutual Fund as your investment option.

Regular mutual fund vs direct mutual fund

There are two ways to invest in mutual funds in India – Regular Mutual Funds and Direct Mutual Funds. The main difference between the two is the way they are sold and the fees that are charged.

Regular Mutual Funds are sold through intermediaries like mutual fund distributors, brokers, and financial advisors. The intermediary receives a commission from the mutual fund company for selling the mutual fund to the investor. This commission is included in the expense ratio of the fund, which is the annual fee charged by the mutual fund company to manage the fund.

On the other hand, Direct Mutual Funds are sold directly by the mutual fund company to the investor, without the involvement of any intermediary. This means that there is no commission paid to an intermediary, and the expense ratio of the fund is lower compared to regular mutual funds.

The key difference between the two is the cost of investment. Direct mutual funds have a lower expense ratio, and hence a lower cost of investment compared to regular mutual funds. Over the long term, the difference in cost can have a significant impact on the returns earned by the investor.

Investors who are comfortable making their own investment decisions and have knowledge of mutual funds can opt for direct mutual funds. However, those who require the assistance of an intermediary may opt for regular mutual funds.

It is important to note that the performance of both direct and regular mutual funds is based on the same underlying portfolio of securities. Therefore, the performance of both funds should be similar, with the only difference being the cost of investment.

PPF account in post office vs banks

PPF accounts can be opened at authorized post offices and designated bank branches across India. The features and benefits of a PPF account remain the same, regardless of whether it is opened in a post office or a bank. However, there may be some differences in the level of service and convenience offered by post offices and banks. Here are some key differences between opening a PPF account in a post office vs a bank:

1. Account Opening: Opening a PPF account in a post office is relatively simpler and faster than opening an account in a bank. This is because post offices generally have a simpler documentation process and a lower account opening balance requirement compared to banks.
2. Deposits: Both post offices and banks allow deposits into PPF accounts. However, banks generally offer more convenience in terms of online transfers and access to ATMs for depositing money. Post offices may have limited working hours and may not offer the same level of convenience.
3. Withdrawals: Withdrawals from PPF accounts are subject to certain restrictions, and the rules are the same for both post offices and banks. However, the process for making withdrawals may be simpler in a bank, as they generally have better online and mobile banking facilities.
4. Interest Rates: The interest rates on PPF accounts are the same, regardless of whether they are opened in a post office or a bank. The rates are fixed by the government and are subject to periodic revisions.
5. Account Maintenance: Both post offices and banks provide account maintenance services for PPF accounts. However, banks may offer more advanced online and mobile banking facilities that make it easier to manage the account and keep track of transactions.

Overall, the choice of whether to open a PPF account in a post office or a bank depends on individual preferences and convenience. While post offices may offer simpler account opening and maintenance processes, banks may offer more advanced facilities for depositing and managing the account.

Conclusion

In summary, PPF is a safer investment option with a guaranteed rate of return and tax benefits, but with a long lock-in period. Mutual funds, on the other hand, offer potentially higher returns but come with market risks and no guarantee of returns. It is important to evaluate your financial goals and risk appetite before deciding which investment option is best for you. Hope this article will help you to take decision on PPF vs Mutual Fund as your investment option.