Mutual Fund vs PPF: Which is the Right Choice for Investment

When it comes to investing for the future, it’s important to choose options that suit your financial goals and risk appetite. Two popular investment choices in India are mutual Funds and the Public Provident Fund (PPF). In this article, we will understand the Mutual Fund vs PPF and also analyse their performance and other important metrics. Keep reading to find out!

Understanding Mutual Funds

Mutual funds are investment vehicles that pool money from various investors who share a common investment objective to invest in stocks, bonds, or other securities. They are managed by professional fund managers who make investment decisions on behalf of the investors. Mutual funds can be classified into different types such as equity funds, debt funds, hybrid funds, tax saver funds and more.

Check out our blog “How Mutual Funds Work” to learn more about mutual funds.

Key Features of Mutual Funds

  1. Professional Financial Guidance: Fund managers make investment decisions on behalf of investors to achieve specific investment objectives.
  2. Diversification: The risk is spread out as mutual funds invest in a variety of securities bringing forth the benefits of diversification. 
  3. Liquidity: Easy to buy and sell mutual funds giving them the benefit of liquidity.
  4. Potential for High Returns: Especially with equity mutual funds as they invest in large and mature companies with high market capitalization. They generate better returns than debt funds but also involve high risk. 
  5. Flexibility: Investors have the option for systematic investment plans (SIP: This allows investors to invest small amounts at regular intervals) and lump-sum investments as per their preference.

Understanding Public Provident Fund (PPF)

The Public Provident Fund (PPF) is a long-term savings scheme offered by the Government of India. It is designed to provide safe and secure returns along with tax benefits. PPF has a fixed interest rate, which is set by the government every quarter. 

Key Features of PPF

  1. Government-Backed scheme: Offers a high level of safety and security.
  2. Fixed Interest Rate: The current PPF interest rate stands at 7.1% per annum for Q1 of FY 2024-25 which is compounded annually. If we take a look at the past performance the returns fall in the range of 7-8%. 
  3. Tax Benefits: Investments made in PPF are tax-deductible under Section 80C of the Income Tax Act, 1961. Interest earned is also tax-free.
  4. Long-Term Commitment: Lock-in period of 15 years, with options for extension in blocks of 5 years.
  5. Withdrawal Facility: Partial withdrawals and loans against the PPF account are allowed after 15 years. If an individual wants to withdraw before the maturity then he is given the option to withdraw 90% after 6 years or opt for premature closure of his account after 5 years. 

Mutual Fund vs PPF: Key Differences

Criteria
Mutual Funds
Public Provident Fund (PPF)
Risk Level
Involves market risk(high in equity funds, lower in debt funds)
Low market risk, government-backed fund
Returns
Market-linked, potential for higher returns
Fixed interest rate (currently 7.1% p.a.)
Tax Benefits
Investments in ELSS (Equity Linked Savings Scheme) provide tax benefits under Section 80C.
Contributions, interest earned, and withdrawals are tax-free under Section 80C.
Liquidity
Highly liquid (except for ELSS with a 3-year lock-in period)
Low, 15-year lock-in period with partial withdrawals allowed after 6 years.
Investment Horizon
Flexible (short-term to long-term)
Long-term (15-year lock-in period)
Expense Ratio
Varies (management fees and other expenses)
No expense ratio
Minimum Investment
Can start with as low as ₹500 in SIPs
Minimum ₹500 per year
Maximum Investment
No maximum limit
Maximum ₹1.5 lakh per financial year
Management
Professionally managed by fund managers
Self-managed
Suitability
Suitable for investors with a higher risk tolerance
Suitable for risk-averse investors
Loan Facility
Not applicable
Loans can be availed against PPF after 3 years

Summary of Key Difference Between PPF and Mutual Funds

  1. Risk and Returns: Mutual funds offer market-linked returns with varying levels of risk, while PPF provides guaranteed, fixed returns with low risk.
  2. Investment Horizon: Mutual funds offer flexibility in investment periods, while PPF is a long-term investment with 15 years of lock-in period.
  3. Tax Benefits: Both offer tax benefits, however, PPF offers full tax-free benefits on contributions, interest earned, and withdrawals.
  4. Liquidity: Mutual funds are highly liquid (except ELSS) whereas PPF has low liquidity due to a long lock-in period and limited withdrawal options.
  5. Management: Mutual funds are managed by professional fund managers while PPF is self-managed.

PPF vs Mutual Funds: Which is the Better Option?

The below comparison of Pros and Cons for both mutual funds and PPF will help you to choose the correct investment option for yourself that best aligns with your financial goals and risk tolerance.

Mutual Fund PPF
Pros Cons Pros Cons
Potential for higher returns, especially with equity funds Involves market risk, returns are not guaranteed. Guaranteed, tax-free returns Long lock-in period of 15 years
Flexibility in investment amount and period. Requires regular monitoring and basic investment knowledge High level of safety with government backing Lower returns compared to equity mutual funds.
High liquidity for most mutual funds. Regular mutual funds involve an expense ratio which reduces the net returns. Tax benefits on contributions, interest, and withdrawals Limited liquidity with an option for only partial withdrawals after a certain time period

Making the Right Choice for Investment

Choosing between mutual funds and PPF depends on your financial goals, risk appetite, and investment horizon. Here are some scenarios to help you decide:

  • If you seek higher returns and are willing to take on market risk: Mutual funds, particularly equity funds, might be a more suitable choice here. They offer potentially high returns with significant growth, especially over the long term.
  • If you prefer a safe, long-term investment with guaranteed returns and tax benefits: PPF can be considered as it offers returns that do not fluctuate too much, and at the same time, they are also considered to be safer as they are government-backed and offer tax benefits. 
  • If you are looking for long-term financial planning and retirement savings: PPF can be considered as it offers assured returns and a safer choice for elderly people.
  • For a balanced approach: Consider diversifying your investment by allocating some of your savings to mutual funds for growth and some to PPF for safety and tax benefits.

Conclusion

Both mutual funds and the PPF have their own set of unique advantages and serve different investment needs. Understanding the difference between PPF and mutual funds can help you make an informed decision based on your financial objectives, risk tolerance, and investment horizon. Rupeezy offers the best direct mutual fund plans and the top platform such as Rupeezy App, for investment without any extra cost or hidden charges. It provides a safe, secure, and extensive platform for a better trading experience. By strategically choosing your investments, you can build a robust and diversified portfolio that aligns with your financial goals.