SIP vs PPF – Which is a Better Investment Option?

Save money

SIP vs PPF – Both plans are helpful for long-term investors, but SIP plans are more riskier than PPF as it is associated with market performance.

Should you be investing in SIPs (Systematic Investment Plans) or PPF (Public Provident Fund) instead? Systematic investment plans or SIPs are investment methods for mutual funds where you invest a certain amount on a monthly basis. The regular sums invested will help in averaging out the purchase price while also safeguarding you from touching any market peak upon investing. SIPs will also help you gain more units of mutual funds whenever the prices of the fund come down.

PPF or Public Provident Fund is the savings scheme that is guaranteed by the Government. The returns remain fixed although they are revised on a quarterly basis by the Government. PPF accounts may be opened with any bank or post office and the interest rate is usually between 7-8% on an average. It was 7.1% for the quarter between October and December 2020.

SIP vs PPF – The Differences

There are quite a few major differences between a SIP plan and PPF investments. For the latter, the returns are revised by the Government and are 7.1% for the October-December, 2020 period while the former has market linked returns.

  • SIPs invest in mutual funds while PPF invests in a portion of Government borrowings and is tailored as per the needs of the Government.
  • The minimum investment amount for PPF is Rs. 500 while the maximum amount can be Rs. 1.5 lakh per annum. SIPs have no maximum investment limits while Rs. 500 is the minimum investment amount every month.
  • The tenure for investment is 15 years as a minimum for PPF and this can be extended in 5-year blocks likewise. The investment period for SIPs may be as low as 6 months or even 20 years if desired. There is no lock-in period for SIPs while PPF comes with a 15-year lock-in period. PPF is a scheme that is backed by the Government and is fully risk-free.
  • The SIP, on the other hand, is tied to the market and is riskier as a result. The PPF investment will be fully exempt from taxes as it falls in the EEE (Exempt-Exempt-Exempt) category. The taxation for SIPs depends upon the mutual fund type. ELSS (equity-linked savings scheme) is eligible for tax deductions up to Rs. 1.5 lakh under Section 80C.
  • Withdrawals are only allowed for PPF from the 7th financial year of investment onwards. SIPs have higher liquidity and investments may be easily redeemed anytime you wish.
  • SIPs, however, have higher potential for generating returns that may easily surpass PPF returns if they are held for a longer duration.

Core points worth noting

PPF is a savings scheme that is assured and backed by the Government of India. The money that has been deposited into the PPF account will be utilized by the Government and interest will be paid likewise to depositors. Defaults are virtually impossible in this regard. Money invested in mutual funds will naturally be subject to risks in the market. The values of equity funds may fluctuate on a daily basis owing to variations in the prices of stocks that are held by any fund. Debt funds may also witness upward and downward movements in terms of value owing to bond price changes.

Yet, there is a higher potential for growth with mutual funds in the long haul. Volatility is what investors must adjust with for getting higher growth in the long run. Mutual fund investments via SIPs further spread out and lower market risks along with providing rupee cost averaging benefits as well. PPF returns remain fixed and are guaranteed by the Government of India. The rates are revised on a quarterly basis. They were at 7.1% for the quarter between October and December 2020. Returns from mutual funds are linked to the performance of the market and various other conditions and trends. The returns may hover between 9.5% and even up to 16% depending upon various factors although risks are always present.

Something that you should also note is that PPF investments will have lower liquidity since there is a 15-year lock-in period and withdrawals are only allowed after the 7th financial year of investment, that too partially. For SIPs, you can withdraw your mutual fund investments anytime you wish. Some funds, however, have lock-in periods like ELSS which comes with tax benefits while there are close-ended funds which have 3-4 year tenures and some funds cannot be redeemed before a year if you wish to avoid paying a penalty or exit load.

Coming to the tax benefits on offer, PPF investments will give you tax benefits under Section 80C up to Rs. 1.5 lakh per annum. The interest will be tax-exempt and so will the maturity amount. Investing in ELSS (equity-linked savings scheme) which is a category of mutual funds, will give you benefits up to Rs. 1.5 lakh under Section 80C in tax deductions. LTCG (long term capital gains) on equity mutual funds will have exemption up to Rs. 1 lakh per annum. Units purchased first in mutual funds will be assumed to have been redeemed first and gains will be taxed likewise.

Which should you invest in?

It is difficult to actually compare between a market-tied investment solution and one that is secure and risk-free with a Government guarantee. You should have some investment in PPF (max PPF deposit limit is 1.5 lakh) along with some money deployed in mutual funds for the right balance of security and higher growth potential. Those who are totally risk-averse may consider PPF investments as their main strategy while those with higher risk tolerance may choose to invest more in mutual funds via SIPs for handsome future growth possibilities.