Mutual Fund SIP vs PPF: Comparison, Returns, And Which Is Better
Did you know that if you want to create wealth in the long run and plan for your future goals, you have the choice of systematic investment plans (SIPs) and public provident funds (PPF). How do you select between these 2 choices? In other words, how do you select between PPF and SIP as an investor?
Start With Your Goal
What do you understand by goals? A goal is nothing but a dream with a financial implication. It is not enough to say, “I want to feel content after retirement”. That is just a dream. To convert that into a goal, you must be able to put a number to it. How much funds you require at retirement? How much funds should you set aside for your daughter’s education? How do you plan to pay the margin money on home loan? These are goals because they are time bound and have money implications.
For instance, mutual fund SIPs and PPF can be excellent choices for long-term investments. The difference is that you normally do SIPs on equity funds, so it is an equity product. On the other hand, PPF is a debt product which gives fixed returns each year.
Let Us Start With The Concept Of SIP and PPF In A Very Basic form.
What Exactly is a Systematic Investment plan (SIP)?
Let us play a small game. You give Rs.100 to your dad and at the end of each month he gives you back 5% more. So Rs.100 becomes Rs.105 after 1 month and Rs.105 becomes Rs.110.25 at the end of second month and this continues. Do you have an idea, how much money you can accumulate this way. If you think Rs.100 is a small amount to start with, think again.
This Rs.100 of yours will grow to Rs.35,000 in 10 years, Rs.1.21 crore in 20 years, Rs.425 crore (wow) in 30 years and Rs.150,000 crore in 40 years. Is that real? That is real and it is called the power of compounding. In SIP, you don’t just compound but also invest a fixed sum each month. SIP is a technique of investing smaller amounts in mutual fund schemes (typically equity funds) at regular intervals.
What Are The Advantages Of SIP
Public Provident Fund or PPF is a government-sponsored savings scheme, which typically pays 7.1% annually. PF again compounds money because there are no pay-outs in between. Instead, the interest is also added to your principal so compounding works here too. But, PPF is a debt product, so the returns are fixed and only the government will change rates from time to time. You cannot earn more or less than the rate. But, the funds are totally secured and the principal and interest are guaranteed by the government. So in PPF you get less returns but more safety.
So ,If SIP Are Riskier, Why Should Prefer SIP At All?
That is like a basic rule of life. In any venture, if you want higher returns, you need to take higher risk. Of course, you must take calculated risks not blind risks. Buying SIPs instead of PPF is like taking a higher calculated risk. An equity SIP can give annual returns of 12-15% on an average over a longer period of 15-20 years. So, if you want to create wealth and plan for your goals, then SIPs in equity funds are a must. The thumb rule here is that when you are young, have more of equity and as you grow older keep adding more debt. But, if you want to meet your goals in the long term, you need to invest in equity fund SIPs. PPF will not be enough, although it is safe and secure. PPF returns are not dependent on equity markets but equity fund SIPs depend on stock market volatility. But, at the end of the day, the biggest risk is not taking sufficient risk.
Ok, So If I Invest In Equity SIP, Can I Expect High Returns In Next 1 Year?
No, that is not the way it works. Equity fund SIPs need time, at least 7-8 years to thoroughly outperform other classes like debt. If you start an equity fund SIP and expect super returns in 2-3 years, you are likely to be disappointed. But if you continue the SIP for at least 7-8 years, you stand a much better chance of making higher returns on the equity mutual fund SIPs.
What Is The Minimum Amount I Need In SIP And PPf
The entry limits are quite low so anybody can easily afford to open a SIP account or a PPF account. Most mutual fund schemes allow a minimum SIP amount is Rs.500 per month. You can select higher amounts, but that is your choice. There is no upper limit. In the case of PPF, you can invest as low as Rs.500 but the upper limit is capped at Rs.150,000 per financial year. You cannot invest more than that in one year.
Do PPF and SIP offer Any Benefit To Me As An Investors?
Let me talk about the PPF first. The PPF investment offers you a yearly exemption under Section 80C up to Rs.150,000. However, you must note that is the overall limit and includes all your Section 80C investments like life insurance, ELSS, tuition fees etc. In the case of mutual fund SIPs, there are no tax benefits for regular mutual funds. However, if you opt for a SIP on ELSS (equity linked savings schemes) funds then you get the same Section 80C benefit as PPF, with an outer overall limit of Rs.50,000. Mutual fund SIPs do not have a lock-in but ELSS funds have a lock-in of 3 years. On the other hand, PPF has a 15-year lock-in.
Which Gives Higher Returns: SIP OR PPF?
It would largely depend on the time frame. In the short term of 1-2 years, equity fund SIP can also give negative returns. However, if you hold the SIP for a period of at least 7-8 years, it has been observed that the returns are in the range of 12% to 15% for equity fund SIPs. In the case of debt funds it is around 7-8% and hybrid funds would be somewhere between that. PPF gives 7.1% currently and that keeps changing at regular intervals. However, the moral of the story is that if you have a time frame of 8 years and above, then equity fund SIPs can be your best bet to create wealth.
How Do The Tax Implication Of PPf And SIP Compere
Let us capture the gist of the difference in a table to understand tax implications.
| Tax Impact Point | PPF | Mutual Fund SIPs |
|---|---|---|
| Contribution to investment | Exempt up to Rs.1.50 lakh outer limit on investment annually under Section 80C | Only ELSS funds are eligible for Section 80C benefits with 3 year lock-in condition |
| Interest / Dividend earned | The interest received by the investors is fully exempt in their hands and is tax-free | As per the latest amendment any dividend from equity fund or debt fund will be taxed at incremental rate |
| Final value taxation | There is no tax on the final value of PPF. It is exempt at 3 levels in total | Taxed based on whether capital gains are classified as LTCG or STCG |
Finally How Do I Make A Choice Between PPF And SIP?
This is not an either/or choice. You need both of them. Here is how you work out your mix.
- If you are young, look at more of equity mutual fund SIPs that can really build returns and wealth over the long term.
- PPF is safe, secure and tax efficient but you are limited to investing just Rs.150,000 per year. There are no such upper limits on SIPs.
- Returns are much higher on equity fund SIPs, if held for a period of 8 years and more, but in short term they are volatile, so set expectations accordingly.
- A lot will depend on your investment objective. But most of the investors have the main objective as creating wealth. So, PPF is essential for the basic security and stability. Beyond that, you need the power of equity funds to boost your returns and wealth.
Over the last many years, equity fund SIPs have emerged as a reliable means of creating wealth over the long run. It is best to consult your financial advisor before taking a final decision on the mix.