August 10, 2023

PPF Vs Mutual Fund

PPF Vs Mutual Fund

The fundamental difference between PPF or Public Provident Fund and mutual funds is that PPF is a risk-free monetary scheme backed by the government of India, whereas mutual funds are collection of funds from different individual investors who are interested in increasing their wealth through power of compounding. 

This article covers : 

PPF Meaning

PPF (Public Provident Fund) is a government-backed scheme that provides risk-free returns and tax savings benefits. It was started in 1968 and provides a fixed return of 7.1% per annum, which is compounded annually. The Ministry of Finance decides this rate every year and pays it on March 31st of each year. PPFs serve a dual purpose by channeling investment and tax savings. 

You can invest in a PPF account in monthly installments or a one-time payment. The minimum amount that you have to invest in PPF in a financial year is 500 rupees, and the maximum amount that you can invest in a financial year is 1.5 lakhs rupees. The PPF account has a lock-in period of 15 years, which means you cannot withdraw your money during this period. You can also extend it for an extra five years.

Only Indian residents who are at least 18 years of age can open a PPF account. The parents or guardians, on behalf of their minor children, can also open a PPF account. The Indian residents who have moved to another country can continue to invest in PPF. 

You can take a loan on one-fourth of the total amount held in your PPF account after two years by paying an interest rate of 1% above the PPF rate. You can withdraw 50% of the total amount after four years of continuous investment. You can also redeem your investment or prematurely close your PPF account after five years if any emergency arises, such as a life-threatening disease, a child’s higher education, or a change in residential status.

Example of PPF: Assume you make a one-time investment of ₹1.5 lakhs in a PPF account with a fixed interest rate of 7.1%. Then, after 15 years, you will get the maturity amount of ₹40,68,209 by investing a total of ₹22,50,000. You will earn a total estimated return of ₹18,18,209.

What Is A Mutual Fund In Simple Words? 

A mutual fund is a sum of collected money that is invested in stocks, bonds, debentures, and short-term market securities. It receives funding from numerous investors and then distributes the units created with that funding. The returns provided by any mutual fund are not fixed, therefore they are risky, but they are managed by professional fund managers. 

You can invest in mutual funds either through a SIP, which is in regular installments with a minimum of just ₹500, or a lump sum, which is a one-time payment. Closed-end mutual funds have a lock-in period, whereas open-end mutual fund schemes do not have this restriction and can be sold at any time.

There are different types of mutual funds, such as equity funds, debt funds, balanced funds, etc., each with its own characteristics. Equity funds have the potential to provide higher returns as compared to debt funds, but they also carry a higher risk. The balanced funds, which invest in a mix of debt and equity securities, will provide average returns with marginal risk.

Difference Between PPF And Mutual Fund

The key difference between PPF and mutual funds is that PPF is a government-supported tax saving scheme that provides a fixed level of returns whereas mutual funds are a scheme that invests in multiple securities and provides fluctuating returns.  

Here is the list of differences between PPF and mutual funds: 

S. No.Points of DifferencePPF (Public Provident Fund)Mutual Funds
1.Type of SchemeThe PPF account provides a fixed rate of return as well as tax benefits.A mutual fund is an investment tool started by different fund houses or AMCs (Asset Management Company) that invests in a pool of market-linked securities with the money collected from various investors and will distribute the units of a mutual fund.
2.Mode of InvestmentYou can invest either with a twelve month installment or a one-time investment in a year.You can invest in a mutual fund with a SIP or with a lump sum. With SIP, you can change the installment amount or pause it at any time. 
3.Minimum Investment AmountThe minimum amount that you have to invest in a PPF account is ₹500 in a financial year.The minimum investment amount is ₹100 with a SIP and ₹1,000 with a lump sum.
4.Maximum Investment AmountThe maximum investment amount is ₹500 in a financial year.There is no maximum limit to the amount you can invest in mutual funds, either through SIPs or lump sums.
5.EligibilityIndian citizens are the only ones eligible to open a PPF account. Indian citizens above the age of 18, NRIs (Non-Resident Indians), and PIOs (Persons of Indian Origin) are eligible to invest in mutual funds.
6.CostYou can open a PPF account by paying a charge of ₹100. You have to pay an expense ratio while investing in any mutual fund, which is determined by every AMC. 
7.Returns The PPF account provides a fixed level of return that is set by the Ministry of Finance every year, and the current rate is 7.1% per annum. Mutual funds do not provide a fixed level of returns, and the returns are totally based on the performance of the securities they have invested in.
8.Purpose of InvestmentThe PPF is a long-term investment scheme that serves the purpose of earning a safe level of return and tax savings. Mutual funds serve the purpose of earning higher wealth in the future. It provides several types of schemes for different investment goals, ranging from short-term to long-term, and tax savings.
9.Risk LevelPPF is completely risk-free because the government assures that a fixed percentage of interest will be paid every year.The risk level varies in different types of mutual funds, with equity funds holding a higher level of risk, hybrid funds a lower level, and further debt funds a much lower level.
10.Tax Savings BenefitPPF provides tax-savings benefits of up to ₹1,50,000 annually under Section 80C of the Income Tax Act. It comes in the category of EEE (exempt, exempt, exempt) where the returns and maturity amount is all tax-free.Only ELSS mutual funds provide tax-saving benefits under the same section. But the earnings and maturity amount are taxable in ELSS. 
11.Maturity TenurePPF has a maturity tenure of at least 15 years, which can be extended to five years. There is no maturity period in mutual funds, as you can buy or sell anytime based on the prevailing NAV.
12.Withdrawal RulesHalf of the amount held in the PPF account can be withdrawn in the fifth year after opening the account.If it is an open-ended mutual fund scheme, you can withdraw at any time, and some AMCs charge a small exit load.  
13.Early RedemptionIf an emergency arises or the account has completed five years, you can redeem the PPF investment with lower interest earnings of 1%.You can redeem your investments in the mutual funds at any time or stop the SIP installments at any time. With ELSS, you have to hold it for a minimum of three years, but you can still stop the SIP. 
14.Minimum Holding PeriodThe minimum holding period, or lock-in period, is 15 years in PPF.There is no lock-in period in the case of mutual funds, except for closed-ended mutual fund schemes. ELSS also has a minimum holding period of 3 years.
15.Amount InvestedThe PPF amount is generally invested in fixed income securities such as government bonds, municipal bonds, etc.Mutual funds hold their money in different securities, such as stocks, bonds, money-market instruments, etc., and provide the benefits of diversification to the investors.

Do you want to expand your knowledge about mutual funds? We’ve got a list of must-read blogs that will help you do just that. Just click on the articles to find out more.

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PPF Vs Mutual Fund- Quick Summary

  • PPF (Public Provident Fund) is a long-term savings scheme that provides a fixed interest rate.
  • Mutual funds are a type of investment where money is pooled from multiple investors and invested in a variety of securities which provides market-based returns. 
  • The difference between PPF and mutual funds is that PPF is a government-supported scheme whereas mutual funds are offered by AMCs.
  • In PPF, there is a maturity tenure of 15 years whereas mutual funds have no such restrictions.
  • PPF provides tax-saving benefits on the invested, returns, and maturity amount whereas ELSS mutual funds provide tax-saving benefits on the invested amount. 

PPF Vs Mutual Fund- Frequently Asked Questions

1. What is the difference between PPF and mutual fund SIP?

The biggest difference between PPF and mutual fund SIP is that PPF has a lock-in period of 15 years, whereas SIP can be stopped or redeemed anytime. 

2. What is the difference between PPF and mutual fund returns?

The biggest difference between PPF and mutual fund returns is that PPF provides a fixed return, whereas mutual funds have the ability to provide higher returns.

3. What is the difference between PPF and mutual fund investment?

The main difference between PPF and mutual fund investment is that PPF requires a minimum investment amount of ₹500 which can go up to ₹1.5 lakhs every year, whereas mutual funds investment can be started at ₹500, and there is no upper limit.

4. What is the difference between PPF and mutual fund performance?

The main difference between PPF and mutual fund’s performance is that PPF gives a fixed interest rate whereas mutual fund’s performance may vary.

5. Is anything better than PPF?

Yes, an ELSS mutual fund is better than a PPF, as both are tax-saving instruments. In ELSS, you can earn higher returns, and it has a shorter lock-in period as compared to the PPF.

6. What is the best age to invest in PPF?

The best age to start investing in PPF is 15 years before your retirement age or any time soon.  

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