When an investor is looking for an investment opportunity to achieve their financial objectives, they can decide where to invest on the basis of the return required, risk profile, & the time for converting cash. Amongst the multiple options available, Mutual funds & PPF are renowned, but are different from one another.
Evaluating the differences between Mutual Funds & Public Provident Funds is considered to be important for the initial stage investors who have an objective of wealth creation in the long run, & to achieve financial freedom via objective-based & smart investments.
What are Mutual Funds?
Mutual Funds are considered to be investment pools, where funds are collected from multiple investors & invested in a diversified portfolio of assets. The investors are supposed to share the profits & losses of the whole fund equally. Due to this shared ownership, these funds are known as “Mutual Funds”.
What is Public Provident Fund (PPF)?
A Public Provident Fund is a type of long-term investment plan backed by the government of India, offering attractive interest rates along with returns. The amount to be deposited in the fund ranges from INR 500 to INR 1,50,000 each financial year, either in EMIs or lump sum. The amount deposited, maturity amount & interest amount are totally exempt from taxes.
Difference between Mutual Funds & PPF
When evaluating the differences between the two, knowing how both work as a savings plan becomes mandatory. Provided are the differences between mutual funds & PPF:
| Basis of Difference | Mutual Funds | Public Provident Fund |
| Nature of Investment | Funds are invested by different investors in a diversified portfolio, which contains debt, equity, or both. | It is a fixed-income savings scheme backed by the Government of India. |
| Returns | The returns are market-linked, hence higher returns | The quarterly rate of interest ranges between 7% & 8%. |
| Risks | It depends on the type of fund, i.e., Debt Funds – Low Risk Equity Funds – High Risk Hybrid Funds – Moderate risk | It contains low risk due to being backed by the Government of India |
| Tenure | No fixed tenure, varies from one investor to another | Minimum of 15 years with an option to extend in a 5-year block |
| Taxation Benefits | Only ELSS investments get a tax deduction u/s 80C, others depend upon the fund types. | Dedication of tax u/s 80c on the amount of premium paid, & the returns are exempt from tax u/s 10(10D). |
| Liquidity | Liquid investments, as the units are allowed to be redeemed at market value. | The loan can be availed once the period of 3 years is completed, & partial withdrawals can be made once the period of 7 years is completed. |
| Tax on Returns | Capital gains, whether short or long term, come under the tax, depending on the nature & tenure of investments. | Interest amount & maturity benefits are exempt from tax. |
| Contribution Limit | No fixed limit, the amount to be invested can be chosen by investors depending on their risk acceptance level & financial objectives. | Minimum: INR 500 Maximum – INR 1,50,000 |
| Best Suited for | From conservative to aggressive investors, depending on risk tolerance level & financial objectives. | Risk-averse investors looking for guaranteed returns |
| Volatility | They are subject to market risks, & volatility is affected by fund performance & economic conditions. | Not affected by market fluctuations |
Features of Mutual Fund Account
Provided are the features of a Mutual Fund Account:
Diversification
It collects funds from different investors & invests in stocks, debts, or assets.
Professional Management
It takes the help of professional fund managers to manage funds, hence saving time & effort.
Affordability
Make small investments which make it easily accessible to everyone.
Liquidity
They are liquid; hence, they can be purchased or sold on any business day.
Systematic Investment Plan (SIP)
Make small investments through SIPS to create wealth over a period of time.
Tax Benefits
Some funds offer tax deduction u/s 80C, such as ELSS.
Transparency
It is a transparent investment which provides updates on the fund’s performance & detailed reports.
No Lock-in Period
Many of the mutual funds do not have a lock-in period.
Features of PPF Account
Provided are the features of a PPF Account:
Tenure:
PPF is a well-designed long-term investment plan with a minimum tenure of 15 years, which can further be extended for a block period of 5 years.
Opening Balance:
One can open a PPF Account with a nominal amount of INR 100 per month.
Investment Limits:
The minimum investment limit is INR 500, & the maximum limit is INR 1,50,000 every financial year. The investment amount can be deposited either in EMIs or in a lump sum.
Frequency of Deposit:
The funds should be deposited into the PPF account a minimum of once each year for 15 years.
Nomination:
An account holder can also be appointed for a PPF account at the time of opening a PPF account or later on.
Mode of Deposit:
The mode of deposit can be cheque, cash, online fund transfer, or demand draft.
Joint Account:
A PPF account cannot be opened in joint names; i.e. it can be held in the name of a single individual.
Tax Benefit:
As per section 80C of the Income Tax Act, 1961, the maturity amount & the proceeds from interest are tax-free.
Partial Withdrawal:
This account allows the partial withdrawal of funds from the 5th financial year onwards.
Risk Factor:
PPF offers guaranteed & risk-free returns along with capital protection because the government backs it
Mutual Funds or PPF- Which is Better?
Risk & Return Profile
Mutual funds are market-linked investments, hence offering higher returns. PPF offers tax-free returns with minimal risk & stable growth.
Liquidity
Mutual funds are highly liquid as they can be redeemed anytime. PPF, on the other hand, has a lock-in period of 15 years & cannot be redeemed for 15 years.
Investment Horizon
Mutual funds are meant for both short & long-term objectives. On the other hand, PPF is suitable for long-term plans.
Diversification
Mutual funds use different asset classes to invest funds, hence reducing the risks. Also, this investment is restricted to government-backed bonds only.
Investing funds in mutual funds or PPF depends entirely upon the financial goals, risk tolerance level, tenure, etc. PPF best suits those who are reluctant to take risks through long-term investments. Mutual funds best suit those who want higher returns due to market-linked investments.
