SIP Vs PPF: Which Is Better Long Term Investment: When investing for the long term, it is extremely important to choose the right option. Public Provident Fund (PPF) and Mutual Fund SIP are two investment options which are very popular among common investors for long term investment. PPF is a government-backed scheme providing secure returns, whereas Mutual Fund SIP means investing in a mutual fund scheme through Systematic Investment Plan (SIP). Both the options encourage disciplined saving and investing, but there is a lot of difference in their risk, return and investment structure. Here we will compare both the options, so that it becomes easier for investors to take the right decision.
PPF means safe and stable returns
PPF is a government scheme designed for risk-averse investors. Its maturity period is 15 years, and it provides guaranteed returns as per the interest rate declared by the government from time to time. There is government guarantee on both interest and invested capital. A maximum of Rs 1.5 lakh can be invested every year in this scheme. On which tax exemption is also available under Section 80C of Income Tax. This scheme is considered ideal for those who want complete security of their capital and returns.
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SIP: Market based return opportunity
Investing in mutual funds through SIP is a flexible and market-linked investment option. You can invest in installments through monthly SIP in the mutual fund scheme of your choice or in multiple schemes. If you want, you can keep the frequency of SIP weekly, quarterly or even annually. But generally monthly SIP is more popular. The amount of return you will get on investment made through SIP depends on the market movements. Especially the stock market has a direct impact on investments made in equity funds. Therefore there is no guarantee of returns in this. Nevertheless, what can be said is that regular investments in equity or hybrid funds over the long term through SIP are generally likely to yield better returns than PPF or any other fixed return instrument. This high return makes SIP a very attractive option for investors in terms of long term wealth creation.
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Comparison of SIP and PPF
in terms of returns See, PPF There is a fixed return scheme which is currently giving interest at the rate of 7.1% per annum. This interest rate is reviewed by the government every 3 months. At the same time, the return on mutual fund SIP is not fixed, but depends on the market movements. Generally this return is higher than fixed return options like PPF.
on a risk scale If compared then PPF It is a completely risk free option, because it is a small savings scheme supported by the government. At the same time, the returns of mutual fund SIP depend on the performance of the market, hence it is affected by market fluctuations. Especially the stock market has a direct impact on the returns of funds investing in equity. This is the reason why the risk in mutual fund SIP is much higher than in PPF, both in terms of capital and returns.
according to liquidity see, then The lock-in period of PPF is 15 years, although after the sixth year, limited partial withdrawal is allowed with certain conditions. Broadly speaking, it can be said that liquidity in PPF is very low. On the other hand, the liquidity of investments made through SIP in mutual funds is much better. Only Equity Linked Savings Scheme (ELSS) has a lock-in of 3 years and solution-oriented funds like retirement funds or children’s funds have a lock-in of 5 years. In all other schemes you can redeem units at any time. However, according to the terms and conditions of that fund, you may have to pay an exit load.
tax benefit in the matter of If we compare both the schemes, then investment in PPF gets tax exemption under Section 80C of the Income Tax Act. Besides, interest and maturity amount are also tax free. That means this is a scheme falling in the Triple E (Exempt-Exempt-Exempt) category. Whereas if you invest in ELSS through mutual fund SIP, then under section 80C, tax exemption is available on investment up to Rs 1.5 lakh in a year. Also, at the time of maturity, there is no tax on profits up to Rs 1.25 lakh in a year i.e. Long Term Capital Gain (LTCG). If the profit is more than this, LTCG tax is levied at the rate of 12.5%, which is beneficial for those falling in higher tax slabs.
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PPF vs SIP: How much corpus will be created with an annual investment of Rs 1.5 lakh?
We can estimate how wealth creation can happen by making regular investments in PPF and SIP for a long period, with the help of the example of an annual investment of Rs 1.5 lakh for 15 years in both. We are taking an amount of Rs 1.5 lakh because this is the maximum investment that can be made in PPF during a financial year.
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Calculation of PPF
If you invest Rs 1.5 lakh every year i.e. Rs 12,500 every month in PPF, then your total contribution in 15 years will be Rs 22.50 lakh. According to the current interest rate of 7.1%, you will get a total interest of Rs 16,94,599 on this amount in 15 years, while your total corpus on maturity will be Rs 39,44,599.
- Investment period in PPF: 15 years
- Current interest rate: 7.1% per annum
- Monthly Investment: Rs 12,500
- Total investment in 15 years: Rs 22.50 lakh
- Total amount received from interest in 15 years: Rs 16.94 lakh
- Corpus after 15 years: Rs 39.45 lakh
SIP calculation
If you deposit Rs 12,500 every month in an equity mutual fund through SIP, then your total contribution in 15 years will be only Rs 22.50 lakh. But if you get an estimated annual return of 12% on this investment, then in 15 years you will get a profit of about Rs 40.57 lakh on your investment and after 15 years your total corpus will be Rs 63.07 lakh.
- Investment period through mutual fund SIP: 15 years
- Estimated Annual Return: 12%
- Monthly Investment: Rs 12,500
- Total investment in 15 years: Rs 22.50 lakh
- Total amount received from interest in 15 years: Rs 40.57 lakh
- Corpus after 15 years: Rs 63.07 lakh
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PPF vs SIP: What is better for you?
After understanding the features and differences between PPF and mutual fund SIP, you will have to decide which option is better for you. While doing this, you must keep in mind your financial priorities, risk taking capacity and investment goals. If you want complete security of your capital and guaranteed returns, then PPF is a reliable option. But if you have the ability to take market risk and want to get better returns in the long term, then you can create wealth by investing through mutual fund SIP. If you want, you can also invest by dividing your portfolio between these two schemes to diversify your portfolio. Before starting investment, assess your financial goals and risk tolerance.
(Disclaimer: The purpose of this article is only to provide information, not to recommend investment in any fund. The past performance of any mutual fund does not guarantee that it will continue in the future. Before investing, please take the advice of a SEBI approved investment advisor. )
