People often ask me, PPF vs SIP which is a better choice?
SIP means Systematic Investment Plan. It is an investment strategy offered by mutual funds to investors. An SIP allows an investor to invest small amounts of money regularly rather than investing a single large amount.
Public Provident Fund (PPF) is a Savings cum tax-Savings Scheme introduced by the National Savings organization of India in 1968. Once a person enrolls for PPF, he has to invest some amount in the scheme every year for 15 years. The invested amount earns interest and helps in building wealth.
Who should worry about PPF vs SIP?
This is applicable to those people who can invest small amounts on a regular basis. Such people usually have four investment avenues.
- Save cash every month in Savings Account.
- Open a Recurring Deposit account and start saving regularly.
- Open a Public Provident Fund (PPF) account and start investing regularly.
- Start a Systematic investment plan (SIP) with a good equity Mutual Fund.
In this article I will do a comparison of SIP and PPF in terms of different parameters.
PPF vs SIP – Structure of the Product
Systematic Investment Plan
A Systematic Investment Plan, also known as an SIP, is a mutual fund investment style that allows an investor to invest small amounts of money regularly rather than investing a single large amount.
With this money, the investor regularly gets units of the mutual fund, depending on the prevailing price of the fund called NAV (Net Asset Value).
For example if the NAV is Rs 71 and the amount invested this month is Rs 5000, the number of units the investor gets is 70.42.
Every month as and when the fund NAV changes, the investor will get different number of units. When the NAV is high, he will get lower number of units and when the NAV is low he will get higher number of units.
Public Provident Fund
In a PPF, a person can invest a maximum fixed amount of Rs 1.5 Lakhs every year. In a year, deposits can be made in one lump-sum or in multiple installments for a maximum of 12. At the end of the period, he gets back his investment and accrued interest.
SIP vs PPF – Returns
An SIP is a mutual fund investment technique. Hence the returns are linked to markets and asset allocation strategy.
Investment Valuation = Investment Amount + Profit/Loss
PPF Interest is calculated annually and credited at the end of the year. The interest calculation is done every month based on lowest balances in account between 5th and last day of the month. Current interest rate is 8.7%, although a cut might be expected soon.
PPF vs SIP – Volatility
Given the facts that mutual funds invest in market linked products like stocks and bonds, there may be significant volatility in the investment value.
An SIP is a semi-fixed income product. For a specific year, the interest rate is fixed – however the rate may vary from year to year.
SIP vs PPF – Goals and Investment Horizons
Systematic Investment Plan
When one has long term goals, like daughter’s education or son’s marriage or retirement planning (10+ year horizon), one is looking at returns, safety and potential for wealth building. For these kind of scenarios, an SIP in a good equity mutual fund is very good option.
Disclaimer: I have qualified the phrase mutual fund with the words good and equity. Equity as an asset class has given better returns than fixed income products over the long term in almost all free-market economies. And good mutual funds have been able to sustain their market edge for longer periods of time than ones which are not that good.
One should invest in PPF if he is ready to commit to a long term horizon (15 years or more). PPF is suitable as a retirement product. It is also useful for young parents who want to plan their children’s education and marriage, 10 to 15 years down the line.
PPF vs SIP – Asset Allocation
The choice between SIP and PPF must also be seen in the context of overall portfolio asset allocation.
As mentioned above, equity as an asset class has the potential to provide higher returns than fixed income securities. On the other hand if you do an SIP in a bad mutual fund, you might lose your entire investment.
A PPF on the other hand being a guaranteed government semi-fixed income product provides stability, security and assured returns.
SIP vs PPF – Tax Aspects
- An SIP in ELSS (Equity Linked Saving Scheme) is elgible for deduction under Section 80C.
- Long-term capital gains in equity SIP are not taxable.
- Interest in PPF is tax free.
- Investment in PPF qualifies for tax-deduction under Section 80C.
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A Few Last Words
Before making any investment decision whether in PPF or SIP, please contact your financial adviser. I have provided this article for educational purpose only.
I hope you found this article on PPF vs SIP Which is better useful. If you have something to add please leave a comment in the post. Please feel free to contact me.