PPF vs SIP Which is better for you?

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.

PPF
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

SIP

  • 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.

PPF

  • Interest in PPF is tax free.
  • Investment in PPF qualifies for tax-deduction under Section 80C.

External Links

Rate Cut in PPF

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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.

Subhodeep Mukhopadhyay

I am a Management Consultant in the Education Sector. In my previous corporate career, I have worked in Banking, Private Equity and Software industry. I am an MBA in Finance/ Computer Engineer and enjoy doing equity research and financial analysis in my free time.

14 thoughts on “PPF vs SIP Which is better for you?

  • March 28, 2016 at 1:03 am
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    I am sticking with PPF for the time being. But I need to diversify to SiP. But PPF will remain the main stay.

    Reply
    • March 28, 2016 at 8:46 am
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      Its a choice one must make based on research, his risk appetite and advice of a Financial Planner :) Thank you for the comment!

      Reply
  • September 14, 2016 at 11:54 pm
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    Have started investing 2000k in long term equity n hybrid fund shall I also invest something in ppf I have a term plan as well.

    Reply
  • September 22, 2016 at 1:34 am
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    I already have ppf. But i want start a sip. I like high return in five years. Which plan is appropriate.

    Reply
    • September 22, 2016 at 9:02 am
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      Please note I cannot make recommendations, but HDFC Equity, HDFC Top 200, Franklin Bluechip have worked for me earlier. Safer option is an index fund like Franklin Index which has given me good returns earlier.

      Reply
  • October 9, 2016 at 7:39 pm
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    i want invest some amount like to 2k but i dont decide which is best for me my all family dependant on me plz reply me soon

    Reply
  • November 30, 2016 at 11:41 am
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    Hi. I want to invest around 5000/month. My objective behind the investment is children education/marriage and retirement income/saving for myself. I am a bit confused between how much to invest in SIP and PPF or should i look for any LIC policy where risk cover plus investment option is available. I desire for maximum assured returns i can get.
    thanks.

    Reply
    • February 11, 2017 at 3:55 pm
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      Generally you should:
      1. Have SIP for growth.
      2. Have PPF for tax saving under 80C/ retirement fund
      3. Have LIC Term Plan for life insurance

      Reply
  • February 21, 2017 at 5:24 pm
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    Hello Sir,

    Nicely explained about investment. For my additional information can you please let me know about below.

    In PPF or in SPI investment will be 1,50,000*15years = 22,50,000INR then what will be the assured minimum returns from individuals.

    Looking forward to hear from your side.

    Reply
    • March 4, 2017 at 12:17 am
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      PPF will offer assured returns at approximately 8% interest rate (average).

      SIP can be anything from -100% to 25% yearly. However over 15 year periods an index fund has historically yielded 14-15%.

      Reply

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