InvestorQ : How does mutual fund investment compare to PPF?
Neha Sharma made post

How does mutual fund investment compare to PPF?

Tarun Madaan answered.
4 years ago

There was a time when gold and realty were considered the best investment options. And for those families who couldn’t afford either of the two, fixed deposits and Public Provident Fund (PPF) became the obvious investment avenues.

However, times have changed and most of us have realised that you don’t end up gaining as much in any of the aforementioned investment avenues.

First let’s understand what a PPF is:

It is a long- term savings investment option that was established by the Government of India in 1968. PPF offers tax benefits on withdrawal as well as on investor contributions. It was one of the most common investment option among the past generations for it inculcated the habit of saving today for a better tomorrow, ie, retirement, and gave guaranteed returns. As it is a government scheme, there is no chance of any default or of any capital erosion. The current PPF rate is 7.6%.

Features of PPF:

· Eligibility– The applicant must be an Indian resident

· Investment- Minimum Rs. 500 per annum and a maximum Rs. 1.5 lakhs.

· Lock-in period: 15 years, which can be extended to another 5 years.

· Returns- Government announces the interest rate every quarter based on government securities.

· Liquidity– Though investments in PPF have a lock in period of 15 years, you can partially withdraw funds from the 7th year.

Thus, PPF is a relatively illiquid form of investment. You can also avail loan against the amount invested which is subject to some upper limit.

· Tax implications– PPF has the E-E-E status among investment options; E-E-E stands for Exempt-Exempt-Exempt, wherein the contribution, interest, and withdrawals are tax exempted.

It also enjoys the benefits of 80C wherein the contribution (up to 1.5 lakhs) is deducted from one’s annual income to arrive at the taxable income.

This helps in reducing your slab rate.

Now let’s understand what mutual funds are:

A collection of stocks or bonds, handled by an experienced fund manager, are called mutual funds. The fund managers buy/sell shares on your behalf. Based on which category of funds he/she is creating, the fund manager creates a portfolio of securities as per the category in which the fund belongs. Mutual funds are the best proxies for those who want to participate in the equity market, but don’t have the time or the knowledge to track individual stocks.

Features of mutual funds:

· Eligibility– Anyone who has a bank account and PAN card can invest in mutual funds.

· Investment– There’s no limit of minimum investments. One can either invest a lump sum amount or do it via Systematic Investment Plan (SIP) wherein an amount gets invested directly from your account on a recurring, per month, basis.

· Returns– Mutual fund returns are linked to the equity market performance. If the market is doing well, chances are your mutual fund investments are also doing well. This is because your mutual funds also consist of the individual stocks that are a part of the equity market. · Lock-in-

Overall, mutual funds do not have a lock-in period. However, the tax-saving mutual fund options- ELSS (Equity Linked Savings Scheme) – which is similar to PPF has a lock-in period of three years.

· Liquidity– Most open-ended mutual funds are 100% liquid.

· Tax implications-If mutual fund units are sold before one year of holding, then short-term capital gains tax apply at 15%. However, if the units are sold after one year then long-term capital gains tax of 10% will be levied on gains exceeding Rs. 1 lakh.

Suppose you earn Rs. 2 lakh in combined long-term capital gains from stocks or mutual fund investments in a financial year. The taxable long-term capital gains will be Rs. 1 lakh (Rs.2 lakh - Rs.1 lakh) and the ensuing tax liability will be Rs.10,000 (10% of Rs.1 lakh)

So, while both the investment options may appeal to various investors, fact is, wealth generation will be significantly higher in the case of mutual funds. Add to it the compounding effect as well as the rupee cost averaging and we have a compelling case in favour of mutual funds. However, that isn’t to say that PPF is a bad investment option. It is, in fact, quite a safe and stable investment option for a completely risk-averse person.