When it comes to long-term wealth creation, Mutual Funds (MFs) and the Public Provident Fund (PPF) are two popular investment options that investors can consider. However, they differ significantly in terms of risk, returns, and other key parameters.
In this article, comparison will be provided between MFs and PPF across seven general critical factors to help you make an informed decision about which investment option is better suited to your financial goals.
Risk and Return Profile
MFs invest in various asset classes including equity, debt, gold, or a combination of these, through various schemes, and their returns are driven by market performance. In contrast, PPF is a government-backed savings instrument that provides a guaranteed interest income. While PPF offers a risk-free return, MFs carry market risk and may deliver good returns over the long term.
Lock-in Period
Most MF schemes are open-ended, which means that their units can be bought and sold at any time from the Asset Management Company (AMC). Also note that MFs also have close ended schemes and interval funds. However, the Equity Linked Saving Scheme (ELSS) - a type of MF scheme - has a lock-in period of 3 years. In contrast, PPF investments have a maturity of 15 years, and barring exceptional circ*mstances, they are effectively locked in for this period.
Investment Amount and Frequency
MF investments can be made with a minimum amount, say ₹100, and there is no upper limit on the investment amount. Periodic investments are not mandatory, but disciplined and consistent investing generally bring long-term benefits. On the other hand, PPF investments require a minimum investment of ₹100, and a minimum investment of ₹500 must be made each year to keep the account active. The maximum permissible amount is ₹150,000 per year.
Tax Benefits
ELSS investments are eligible for deduction under section 80C of the Income Tax Act up to ₹150,000, and all MF investments attract a capital gains tax. In contrast, PPF investments are eligible for tax deduction under section 80C of the Income Tax Act, and the maturity proceeds are also tax-exempt.
In view of the individual nature of tax consequences, each investor is advised to consult his / her own professional tax advisor.
Costs and Charges
Investments in MF schemes havea cost in the form of a Fund Management Charge (FMC), whereas there is no cost for investing in the PPF.
Guaranteed Returns
PPF investments offer guaranteed interest rate, which is defined every quarter. The current interest rate on PPF is 7.1% (Apr-Jun 2023, Ministry of Finance). On the other hand, MFs do not offer any guaranteed returns, and their performance depends on market fluctuations.
Withdrawals and Extensions
Part withdrawals are permitted after the 6th year of PPF investments subject to certain conditions, and the accounts can be extended for 5-year intervals after maturity. In contrast, open ended MF investments can be bought and sold at any time, and there are no restrictions on withdrawals. However, there are also close ended and interval Mutual Fund schemes.
Which Investment Option is Better for You?
PPF investments are ideal for investors seeking safe and guaranteed returns with an element of tax saving. On the other hand, MF investments are better for investors seeking capital appreciation over a long period. Both have a place in the portfolio depending on the investor's financial goals.
Table of Differences: Mutual Fund vs. PPF
| Sr.No. | Mutual Funds (MF) | Public Provident Fund (PPF) |
|---|---|---|
| 1. | MF schemes invest in various asset class including equity, debt, gold, or a combination of these. | Government-backed saving instrument. |
| 2. | Returns are driven by the market performance of bonds and equity. | Guaranteed interest rate which is reset every quarter. |
| 3. | Most schemes are open-ended with no lock-in periods. | Investments are locked in for 15 years. |
| 4. | Minimum investment of ₹100/- with no upper limit. | Can start with ₹100/- and a minimum investment of ₹500/- every year. The maximum permissible amount is ₹150,000/- per year. |
| 5. | Only investment in ELSS schemes eligible for deduction u/s 80C up to Rs. 150,000/-. Profits on sale of MF units are subject to capital gains tax. | Investments in PPF are eligible for tax deduction u/s 80C. Maturity proceeds are tax-free. |
| 6. | Subject to market risk and fluctuations. | Principal and interest income are both guaranteed. |
| 7. | Investment in MF schemes has a cost in the form of a scheme expenses. | There is no cost for investing in the PPF. |
In view of individual nature of tax consequences, each investor is advised to consult his / her own professional tax advisor. The information contained in this document is for general purposes only and not an investment advice. Readers should seek professional advice before taking any investment related decisions.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY
