sip-vs-ppf

SIP VS PPF – Which is better

The primary distinction between SIP (Systematic Investment Plan) and PPF (Public Provident Fund) is that SIP is a method of investing in mutual funds or stocks in a staggered manner over a period of time, while PPF is a long-term saving scheme with a fixed interest rate offered by the government. 

This article covers: 

SIP Meaning

SIP (Systematic Investment Plan) is one way to invest in any mutual fund wherein the installments can be paid weekly, monthly, annually, or semi-annually to purchase the units of a selected mutual fund.

In a SIP, you will get these units of the mutual funds on the basis of their current NAV. NAV (Net Asset Value) is actually the market price of a single unit of a mutual fund, which gets changed on the basis of the performance of all the securities in which it has invested its money. 

Let’s see the example to clearly understand how you will get the units based on the monthly SIP. Suppose you are investing ₹1,000 in a mutual fund that has a current NAV per unit of ₹45; then you will be allotted 22.22 units. Next month, if the NAV rises to ₹47, then you will get 21.27 units, and in the third month, if the NAV falls to ₹40, then you will get 25 units. Therefore, the total average cost of purchasing a single unit of a mutual fund is ₹43.80. 

This example clearly indicates that the rise in NAV will allot you a lesser number of units, and the fall in NAV will allot you a greater number of units with the same SIP amount. But in the long run, this cost of purchasing will average down, and you will get the benefit of the power of compounding if you start as early as possible. 

PPF Meaning

PPF (Public Provident Fund) is an account or investment scheme that provides a fixed interest rate and is backed by the trust of the Government of India. This is one of the best instruments to save tax up to ₹1,50,000 under Section 80C of the Income Tax Act, 1961. You can invest in PPF in any way, either through a lump sum or monthly installments.

SIP VS PPF – Difference between SIP & Public Provident Fund

The main difference between SIP and PPF is that SIP allows you to invest in ELSS mutual funds that provide market-linked returns, whereas PPF provides an assured level of returns. Both the ELSS and PPF can be used to save the tax under Section 80C of the Income Tax Act. 

S. No. Points of DifferenceSIP (Systematic Investment Plan)PPF (Public Provident Fund)
1.Purpose of InvestmentThe purpose of SIPs is to provide inflation-beating earnings by investing in mutual funds with regular installments. Additionally, the ELSS funds’ purpose is to reduce yearly tax liabilities.The purpose of the PPF is to provide tax savings benefits and fixed returns and build a corpus of funds in the long run for retirement planning.
2.Interest EarningsIn SIP mutual funds or ELSS mutual funds, the interest rate is not fixed because it is directly linked to the securities, which change on a real-time basis.  In PPF, the interest rate is fixed by the GOI at 7.1% for the financial year 2023-24.
3.Instrument UsedIn SIP, the instrument used is mutual funds which invest in stocks and bonds. In PPF, the instrument is government securities, which provide fixed returns. 
4.Minimum Investment AmountThe minimum amount that you can invest through SIP is ₹100 or ₹500, which differs for every scheme. The minimum amount that you can invest in PPF is ₹500. 
5.Maximum Investment AmountThere is no maximum amount that you can invest in mutual funds through a SIP. But in ELSS, you will get tax benefits only up to an amount of 1.5 lakh rupees in a year.The maximum amount that you can invest in PPF is 1.5 lakh rupees in a financial year.
6.Number of InstallmentsIn SIPs, the installments may vary from fund to fund and can be weekly, monthly, quarterly, semi-annually, or annually.In PPF, either you can invest the whole amount of 1.5 lakh rupees in a one-time payment. With installments, you have to pay at least one monthly installment, and the maximum is 12 installments in a financial year.
7.Risk LevelMutual funds carry a high level of risk because their returns are subject to the performance of the underlying securities. The PPF is completely risk-free because it provides a fixed interest rate that is trusted by the government. 
8.Liquidity If the mutual fund is an open-ended scheme, the amount can be liquidated at any time. The closed-ended mutual funds can also be liquidated by paying a certain percentage as an expense ratio.You can redeem or withdraw the PPF amount only after the fifth year, with certain limitations that indicate much lower liquidity.
9.Maturity PeriodThere is no maturity period for mutual funds except for ELSS funds, which is 3 years. The maturity period for PPF 15 years, which can be extended by an additional five years. 
10.Minimum Investment PeriodIn open-ended mutual funds, you can withdraw anytime. In closed-ended mutual funds, you have to remain invested for the duration of the lock-in period for that particular scheme. In PPF, you can redeem your holdings after the fifth year of opening the account if any emergency arises. 
11.Yearly Tax Savings LimitWith ELSS mutual funds, you can get tax savings on the yearly invested amount of up to 1.5 lakh rupees under Section 80C (inclusive of all the investment options) of the Income Tax Act, 1961.In PPF, you can get tax savings on the yearly invested amount of up to 1.5 lakh rupees under the same section.
12.Tax TreatmentIn ELSS, the short-term capital gains earned within one year of investment will be taxed at a rate of 15%, and the long-term capital gains earned after one year of investment are taxed at 10% if they are more than Rs 1 lakh.The PPF comes under the EEE category of exempt-exempt-exempt. It means that the investment amount, interest earnings, and maturity amount are all tax-free.
13.Right Time to InvestWith SIP, there is no right time to start investing in any mutual fund because you will get the benefits of rupee cost averaging and the power of compounding in the long run.In PPF, the interest amount is calculated on the basis of the last balance, as shown on the 5th of every month, and is paid at the end of the financial year. Therefore, the right time to invest in them is before the 5th of every month if you are paying monthly installments.

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SIP VS PPF- Quick Summary

  • SIP is a way to invest in mutual funds in installments that provide market-linked returns. 
  • PPF is an investment scheme that provides fixed earnings and tax-saving benefits.
  • The key difference between SIP and PPF is that SIP investing in ELSS provides tax saving only on the invested amount, while in PPF, all the invested amount, interest, and maturity are tax-free. 
  • In SIP, there is no maximum amount that you can invest, while in PPF, you can invest only ₹1,50,000 in a year. 
  • ELSS has a maturity period of 3 years, while PPF has a maturity period of 15 years. 

SIP VS PPF- Frequently Asked Questions

1. What is the difference between SIP and PPF?

The difference between SIP and PPF is that in SIP, you will get market-linked returns through investing in mutual funds, while in PPF, you will get assured returns. 

2. Which is better PPF or mutual fund?

PPF is better than a mutual fund because it provides fixed earnings for a 15-year tenure and saves on taxes as well, and they are best for risk-averse investors. 

3. Is SIP tax-free?

SIP is tax-free only when you invest in ELSS mutual funds, and for other types of mutual funds, the tax rates will vary. 

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