Indians love safe investment options(PPF vs Mutual Fund). According to us, Safe investment is one that offers a fixed return in a fixed time.
We believe so much in this, that we often forget what a safe investment option actually is and apart from these two parameters the other parameters to evaluate investment options.
PPF vs Mutual Fund Which is Better
Can PPF beat Mutual fund? to know the answer let’s begin the face off. Let’s evaluate both the options on para meter no.1
PPF offers a fixed interest rate. This usually hovers around 8%-9%. In the last 50 years, It has touched 12% high and gone down to as low as 4%.
Investing in equity mutual funds for a long duration can get you better returns than any other option. In the long term, Equity Mutual Funds can easily offer 10%-12% returns.
These kinds of returns are difficult to get in any other investment option. So I will award 4.5 to mutual funds and 2.5 to PPF.
Now let’s talk about the option through which the investment can be redeemed at the time of emergencies. During the financial emergencies, the money can’t be withdrawn from the PPF account.
PPF has a lock-in of 15 years. Once invested, the investor will have to complete the 15-year term. There are a few exemptions. After 7 years for selective reasons like buying a house or medical emergency, the money can be withdrawn. But not the entire amount.
Money can be withdrawn easily from a mutual fund account. With just a few formalities, the amount is credited to your account in 3-4 days.
The withdrawal process is also very simple. This can be completed from the comfort of your home. With PPF you save tax with a lock-in of 15years whereas with ELSS you can save tax with a lock-in of just 3 years.
In terms of liquidity, ELSS is an amazing option. Here I will give 4 marks to Mutual Fund and 2 to PPF.
Tax On Return
Now let’s see how tax effects return in both the options. Let’s understand how returns are taxed in both these two. Because we will get to know about the real returns after we calculate the returns after tax.
When it comes to tax, you get tax benefits under sec 80C on investment in PPF. This comes under the category of EEE.
It means that from investment to maturity amount, no tax is levied. You can save tax by investing in equity-linked saving schemes mutual funds.
In long term equity mutual funds, a 10% LTCG tax is levied.year, on the profit exceeding 1 lakh, in a financial.
This 10% is levied on the profit that exceeds1 lakh. Meaning, profit up to 1 lakh is tax-free. PPF has left behind Mutual funds in tax benefits. I will award PPF 4 and Mutual funds 3.
The biggest test of an investment option is its ability to beat inflation. Let’s see which is the better of the two here If we talk about retail inflation then PPF can beat that because of its high interest rates.
But, when we break inflation into sectors,then we see a different picture. The biggest example here is education inflation which is in double digits.
PPF might not be able to accumulate sufficient wealth required for the higher education of children and retirement planning. In the long term, the equity mutual funds can give as high as 12% returns.
It means the possibility of earning a higher return is more with mutual funds than PPF. It means mutual funds can beat inflation better. Here, I will award 3 to PPF and 4 to MF.
The next point I would like to talk about is that RISK PPF doesn’t involve any risk. You get a fixed return in this. The amount invested is locked in for a fixed time period.
At the time of maturity, the amount is returned with the interest. In Equity mutual funds, the risk reduces substantially in the long term.
But in the short term, there is risk involved. But just like PPF is a long term product, the money is invested for 15 years, in the long term, the risk is almost negligible in equity mutual funds.
The possibility of getting double-digit returns is also high. Looking at the risk profile of both,i will give 4 marks to PPF and 4 to Mutual funds Mutual funds have defeated PPF. Mutual funds option is the winner of all the rounds.