#FinancialBytes: PPF or Mutual Fund: Which is better for investment?
Both Public Provident Fund (PPF) and Mutual Funds (MFs) rank among the most popular investment avenues of today's investment world. Over the years, PPF has remained a preferred choice as it offers guaranteed returns and tax-saving benefits. But in recent times, mutual funds have also attracted investors' interest owing to the high returns they come with. Here's a detailed comparison of PPF and MFs.
First off, what are PPF and Mutual funds?
The Public Provident Fund is a tax-free saving scheme which is run by the Indian government whereas a mutual fund is a professionally managed investment instrument wherein a large number of people invest their money in equities, bonds, money market instruments and/or in other securities.
PPF is for long-term savings; MFs are for short-term too
The objective of making an investment can be either to create long-term savings or make short/medium term income. While PPF only fulfills the objective of accumulating wealth over a long-term period as it comes with a minimum investment tenure of 15 years, mutual funds come with all time lengths, be it long-term, medium-term or short-term.
PPF are highly secured instrument; Mutual Funds involve risk factor
Being a government-backed saving scheme, PPF is a highly secured investment instrument which gives you guaranteed returns and involves a zero degree of risk. The interest rate on PPF for FY 2018-19 is 7.6%. Whereas, being market-based investment instruments, mutual funds offer fluctuating returns- high or low depending upon the performance of the securities in the market, and thus involve a degree of risk.
Taxation of PPF and Mutual funds
PPF investment qualifies for a tax deduction of up to Rs. 1,50,000 under Section 80C of the Income Tax Act. Moreover, all the returns earned from PPF investment are tax-exempted under Section 80C. Whereas, in case of mutual funds, only Equity-Linked Saving Schemes are tax-deductible up to Rs. 1,50,000 under section 80C. And, all Long-Term Capital Gains exceeding Rs. 1L are taxed at 10%.
PPF is not a liquid instrument, while Mutual Funds are
Being a long-term saving scheme in which money remains invested for 15 years, PPF does not offer liquidity. You can start withdrawing money from it from the seventh year onwards. On the other hand, mutual funds allow withdrawal of money at any time. Notably, if the mutual fund involves a lock-in period, you may have to pay some minimal exit load charges.
