Should I Choose SIP Or Public Provident Fund?

SIP or Systematic Investment Plan is a method of investing in mutual funds. You can invest a fixed amount every month in a mutual fund through SIP. The regular investment strategy averages out your purchase price and protects you from inadvertently catching a market peak when you invest. A SIP also gives you more mutual fund units, when the fund price drops.

PPF or Public Provident Fund is a government-guaranteed savings scheme. The returns are fixed but set by the government every quarter. You can open a PPF account with the post office or most major banks. 

A Comparison Between SIP And Public Provident Fund

Here is a comparison between SIP and public provident fund: 

1. Safety

PPF is a government-backed savings instrument. The money deposited in PPF is utilised by the Government and interest on the same is also paid by the government. There is hence virtually no possibility of default. On the other hand, the money in mutual funds is subject to market risks. The value of equity funds fluctuates almost every day due to variations in prices of stocks held by the fund. Debt funds also move up and down in value due to changes in bond prices.

2. Returns

The returns on PPF are fixed and guaranteed by the government. The exact rate is set every quarter. Historically rates have fluctuated around 8% per annum. On the other hand, the returns of mutual funds are market-linked. It varies as per the market conditions as well as the performance of the fund manager. The returns of a few of India’s largest funds are mentioned below. 

Also read - Exploring Public Provident Fund Scheme And Its Benefits 

3. Liquidity

PPF deposits have a lock-in period of 15 years. Whereas your investment in mutual funds (open-ended) can be redeemed on any business day. The flexibility of redeeming your funds as per the requirement makes mutual funds investment much more liquid than PPF deposits. Further, mutual fund houses impose a penalty (called exit load) if you redeem your investment too early, usually within one year of investing. There are also some ‘close-ended funds’ which have a tenure of 3-4 years. You cannot redeem your investment in these funds before the expiry of the term.

4. Taxation

Investment in the PPF accounts for a tax deduction up to Rs 1.5 lakh per annum under Section 80C of the Income Tax Act, 1961. The interest on the PPF is also exempt from tax but must be declared in the annual income tax return. The PPF maturity amount is also exempt from tax. In other words, PPF enjoys ‘exempt, exempt, exempt’ tax treatment. Returns on mutual funds are taxed as per the type of mutual fund scheme and investment tenure. Investment in a specific category of mutual funds, called ELSS funds also gets you a tax deduction up to Rs 1.5 lakh per annum under Section 80C. However, this does not apply to other mutual fund categories. In case of SIPs, the taxation of mutual fund gains is based on the ‘First-in-First-out’ (FIFO) principle. Units which are purchased first are assumed to be redeemed first when you put in your redemption request and gains are taxed accordingly.

Conclusion

While it is difficult to compare a market-linked product with a fixed income one, investment in PPF is recommended for absolutely risk-averse individuals. Investors who are willing to take a moderate risk to earn higher returns can invest in mutual funds. The moderate risk can even further be minimized by investing through a long term SIP route in mutual funds.

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Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.