Mutual funds vs ppf is a question that crosses the minds of most investors when doing a pre-tax return comparison of these investment options.
Mutual funds have equity & debt options both and when a comparison with PPF is drawn, it only makes sense to not compare apples to oranges and thus the comparison should ideally be done with the long term debt oriented mutual funds. Long term specifically because PPF is a long term investment with mandatory lock in of 15 years. While the return on PPF is fixed annually and is currently at 7.1%, the returns from any kind of mutual fund investment across debt or equity are not fixed.
For conservative investors or for those who prefer capital protection & assured returns, PPF scores over mutual funds on all grounds as PPF is one of the safest investment avenues and the returns on PPF are also fixed. These returns can be revised in the beginning of a financial year but one does not expect grave movements as PPF is a government scheme and even if the returns are revised downwards, the revision is not that drastic.
The fifteen year lock in feature of PPF does to some extent restrict its fitment for funding financial goals due in a shorter span of time even for conservative or income oriented investors. Mutual funds do not have a lock in, do have exit loads which must be analysed and known before making any investment to make sure that one can set return expectations taking into account these loads and other charges as may be applicable if one is to withdraw funds in the interim.
Mutual funds apart from being highly liquid, also carry better return potential, both on equity as well as debt side. For income oriented or conservative to balanced investors too, systematic investment plans in mutual funds serve as the most suitable investment avenues for funding their goals due within the span of 15 years which is the lock in period in PPF otherwise.
The PPF does have options as loan facility and withdrawal but there is a set limit to which one can avail these options and the involvement of paperwork and a clear number of reasons or occasions against which one can withdraw limits the liquidity in PPF further making mutual funds a more preferred avenue for goal funding.
Mutual fund or PPF is one way of looking at it and the other is mutual funds and PPF and the latter has its own benefits and diversification is one of them.
If we were to look at our financial lives as a whole and take a complete view of the different common life goals that one may have, PPF fits the bill as a retirement planning tool as a part of the debt investment portfolio as also because of its longish time horizon that it carries.
The returns on PPF have been coming down and from 8.5% a couple of years back, the returns have fallen to the tune of 140 bps in a rather lesser span of time. Yes, the returns are tax free and assured but are seeing a downward trend. Mutual funds on the other hand do not have fixed returns but their active management has historically generated above average returns, where the average for equity funds is of course higher than that of debt funds. The 15 year CAGR for equities has been to the tune of 16-18% and while there is a tax on gains from equity that has been levied now, earlier these returns were completely tax free.
Tax on long term equity gains is 10% while short term equity gains are taxed at 15%. Short term returns from debt mutual funds are taxed at the respective tax slab of the individual while long term returns (returns after holding period of 3 years or more) are taxed at 10% without indexation of returns and at 20% after indexation.
Mutual funds and PPF thus works better than Mutual Funds vs PPF. There will of course be different allocation of these two depending on investor risk profile and time horizon to goals. So, there can be multiple scenarios with allocation to PPF and Mutual funds changing as per changes in investor’s risk profile, investment horizon and overall asset allocation in debt and equity.
For example, an investor who is conservative but has a goal coming up in the next 5 years, the allocation will be more in debt oriented mutual funds as PPF term is not aligned with his investment horizon. For an aggressive and a conservative investor with the same investment horizon of 15 years or more, the former can have a greater part of allocation in equity based mutual funds while the latter will have it in PPF.
If we compare purely on returns basis, mutual funds have historically delivered much better returns than PPF but the intermittent volatility in these funds and the risk associated with them cannot be ignored. Yes, if we take in consideration the PPF lock in and that long a time horizon for investing, the risk in mutual funds is well averaged out and the returns are of course on an even higher side in equity funds vis-à-vis debt funds.
Purely on a goal funding basis, PPF suits the long term planning needs and is a good add on in the investor portfolio and the exact percentage of investment can be worked out in the financial plan drawn for an individual. Likewise, Mutual funds and their various categories can be considered for investment to meet the short term, medium term as well as long term goal funding needs of an individual and this flexibility of meeting different investment and goal needs comes better in mutual funds.
To sum it up, both Public Provident Fund and Mutual Funds have their own place and must form a part of an action plan in any financial plan drawn, the proportion of holding in the two avenues depends on client needs and attributes too.
People often ask
- What if PPF is not paid?
- Can I have 2 PPF accounts?
- What if I deposit more than 1.5 lakh in PPF?
- What are the disadvantages of PPF accounts?
- How is PPF interest calculated?
If the minimum contribution of Rs.500 is not made in a PPF in a financial year, the account gets suspended.
No, one can open only 1 PPF account and if one does till open another account, he / she gets no interest in the second account so opened.
One cannot deposit more than 1.5 lacs in PPF as the excess transaction will not pass through and will be rejected there and then.
Apart from the 15 year lock in that is a key feature of PPF accounts, the reducing rate of return is another disadvantage associated with PPF investments.
The PPF interest is calculated monthly on the 5th of every month but is payable annually.