SIP Vs PPF : Which Is Better Long Term Investment : While investing for the long term, it is very important to choose the right option. Public Provident Fund (PPF) and Mutual Fund SIP are two such investment options, which are very popular among common investors in terms of long term investment. PPF is a government-backed scheme giving safe returns, while Mutual Fund SIP means investing in a mutual fund scheme through Systematic Investment Plan (SIP). Both the options promote 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 return
PPF is a government scheme, which is designed for risk-averse investors. Its maturity period is 15 years, and it gives guaranteed returns according to the interest rate announced by the government from time to time. There is a 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.
SIP: Opportunity for market based returns
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 many schemes. If you want, you can keep the frequency of SIP weekly, quarterly or even annually. But generally monthly SIP is more popular. How much return will be received on the investment made through SIP depends on the market movement. Especially the stock market has a direct impact on the investment made in equity funds. Therefore, there is no guarantee of return in this. Nevertheless, it can be said that regular investment in equity or hybrid funds through SIP over a long period of time is usually likely to give better returns than PPF or any fixed return instrument. This high return makes SIP a very attractive option for investors in terms of long term wealth creation.
Comparison of SIP and PPF
In terms of returns, PPF is a fixed return scheme which is currently getting interest at the rate of 7.1% per annum. This interest rate is reviewed by the government every 3 months. On the other hand, the return on mutual fund SIP is not fixed, but depends on the market movement. Usually this return is higher than fixed return options like PPF.
If we compare the risk, PPF is completely risk free because it is a government-backed small savings scheme. On the other hand, the return of mutual fund SIP depends on the performance of the market, so it is affected by the fluctuations of the market. Especially the returns of funds investing in equity are directly affected by the stock market. This is the reason why the risk in mutual fund SIP is much higher than PPF, both in terms of capital and return.
In terms of liquidity, the lock-in period of PPF is 15 years, although after the sixth year, partial withdrawal is allowed with limited conditions. Broadly, 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 Saving 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 the units at any time. However, you may have to pay exit load as per the terms and conditions of that fund.
If we compare both the schemes in terms of tax benefits, then investment made in PPF is tax exempted under Section 80C of the Income Tax Act. Also, interest and maturity amount are also tax free. That is, it is a scheme that comes under the Triple E (Exempt-Exempt-Exempt) category. On the other hand, if you invest in ELSS through mutual fund SIP, then tax exemption is also available on investment up to Rs 1.5 lakh per year under Section 80C. Also, at the time of maturity, there is no tax on profit 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 the higher tax slab.
PPF vs SIP: How much corpus will be created by investing Rs 1.5 lakh annually
We can estimate how wealth creation can happen by investing regularly in PPF and SIP for a long period with the help of an example of investing Rs 1.5 lakh annually for 15 years in both. We are taking the amount of Rs 1.5 lakh because this is the maximum investment that can be made in PPF during a financial year.
