This Article is From Jun 28, 2018

Public Provident Funds (PPF) Vs Mutual Funds (MF): Which Is Your Choice?

Investors rely on mutual funds (MFs) when they want to create wealth while public provident funds (PPF) are handy when a customer wants to save money.

Public Provident Funds (PPF) Vs Mutual Funds (MF): Which Is Your Choice?

Public provident funds (PPFs) offer fixed interest rate; mutual funds (MFs) are subject to market risks.

Both mutual funds (MFs) and public provident funds (PPF) are popular investment and savings schemes respectively. Investors rely on mutual funds when they want to create wealth while PPFs are handy when a customer wants to save money and then build on his wealth. PPF scheme is backed by the government and guarantees an assured interest rate and returns. Mutual fund, however, are subject to market risks. If you want to invest in either of the two, you should know about their features, advantages and disadvantages and then make a prudent decision.

Advantages of mutual funds
1) The biggest advantage in mutual fund investing is the liquidity available in open-ended schemes. In case of most debt schemes, the pay-out cycle is t+1 i.e. you put in redemption today and you get your funds the next day. The redemption of mutual funds is thus fairly easy. In most cases it can be done online.

2) "There is no amount restriction on any individual and there are offerings suited in line with one's investment tenure and/or one's risk appetite," said Lakshmi Iyer, CIO (Debt) & Head -Products, Kotak Mutual Fund.

3) Taxation in mutual funds varies depending on whether one is investing in equity- or debt-based schemes. Debt funds offer the benefit of indexation, which means that you can bring down your taxable gains on the investments by inflating the purchasing price. This is good from investors' perspective.  

4) Mutual funds invest in a pool of 60-70 stocks and bonds. Since mutual funds are diversified, it reduces their overall risk.

5) Besides, mutual funds are managed by professional fund managers who have a team of analysts. These experts track stocks, sectors, industries etc., which helps them make wise investment decisions for their clients.

6) Mutual funds can be invested into via the SIP route also. Systemic Investment Plans or SIPs allows investors to invest in mutual funds through small and periodic instalments. Investors can enjoy the power of compounding when they invest in mutual funds via SIP. "When you extend the investment period, you can earn profit not only on your original investments, but also on any interest, dividends, and capital gains that accumulate, so your money can grow faster and faster as the years roll on," said Amit Kachroo, Managing Partner, Aaneev Wealth Builders.

Advantages of public provident funds
1) Public provident funds offer a fixed interest rate. The interest rates on PPF are decided every quarter by the government. For the quarter ending June, PPF investments will fetch an interest rate of 7.6 per cent per annum. Investment in PPF is safe and the yield is fixed. There is no risk involved.

2) Since PPF accounts have a long tenure of 15 years, the impact of compounding is huge, especially in the later years.

3) PPF accounts enjoy a an exempt, exempt, exempt (EEE) status, which means that the returns are exempt from tax, the maturity amount is tax-free and the main investment qualifies for a deduction under section 80C of the Income Tax Act. The contributions made to PPF accounts can be claimed for tax rebate up to Rs.1,50,000.

4) If a PPF customer wants to avail a loan, he can do so from third financial year onwards. This facility is available till the fifth financial year and the loan can be taken once a year. Moreover, the PPF account can be extended for another five years after the main 15 years are completed.

Disadvantages of mutual funds
1) Returns on mutual funds are not guaranteed but linked to market sentiments. You can take cues from the past returns of mutual fund, but that clearly is no indication of its future performance. There are periods when mutual funds underperform the broader markets, which can be frustrating for investors. The true returns of a mutual fund scheme can only be realized in the long term. Hence you have to be extremely patient with your mutual fund portfolios.

2) A liquid fund - which invests in treasury bills and corporate papers and offers low interest rates among debt funds - could also be subject to volatility in markets, though it would be lower given the underlying investments are of a shorter tenure. Therefore, the key to note while investing in any mutual fund scheme is to ascertain one's investment tenure, said Ms Iyer.

3) Since mutual funds are professionally-managed funds, there are some charges which mutual fund companies have to pay to the management and fund managers. Most mutual funds charge entry or load or both to meet the professional management expenses. These expenses directly affect the returns that an individual is able to realize from his/her investment portfolio. In some cases, if an investor pulls out money before one year, he/she has to pay an exit load of 1 per cent depending upon the fund.

4) Some mutual funds like equity-linked saving schemes (ELSS) - which help save income tax - or close-ended funds have a lock-in period of three years or so. The money, thus, cannot be redeemed before that time period.

5) Returns from mutual funds are charged under short-term capital gains (STCG) tax currently at 15 per cent plus cess if the holding period is less than a year and are charged under long-term capital gains (LTCG) tax on returns above Rs.1,00,000 at 10 per cent plus cess if the holdings are for more than one year. The dividend income from mutual funds comes under the dividend distribution tax and automatically gets deducted.

6) As an investor, you can only opt to invest in a particular mutual fund - you cannot select your investment in a particular stock. Therefore, you are forced to subscribe to the investment thesis of the fund manager.

Disadvantages of public provident funds
1) PPF requires you to make an investment for 15 years. Withdrawals from PPF accounts can be done after the seventh financial year but only 50 per cent of the accumulated amount can be withdrawn by the fifth year.

2) You cannot close your PPF account prematurely. Only in case of death of the account holder can the PPF account be closed.

3) As per the rules, a minimum contribution of Rs 500 per year and maximum of Rs 1.5 lakh per annum is allowed. The limit of Rs 1.5 lakh is applicable on all accounts either held in investor's own name or on behalf of a minor.

4) Only a resident individual can open a PPF account and no joint ownership is allowed. One cannot open more than one account in his/her own name. However, an account opened on behalf of a minor is treated as separate. Non-resident individuals (NRI), Hindu Undivided Families (HUF) or body of individuals (BoI) cannot invest in PPF.

Features of mutual funds, public provident funds compared

 Public Provident Fund (PPF)Mutual Funds (MF)
Minimum InvestmentInvestors can open PPF account with Rs 100. Investors can invest as low as Rs 500 and maximum Rs 1.5 in a financial year.Investors can invest small amount as low as Rs.500. There is no maximum limit.
Investment choiceThere are no investment options in PPF. An investor has to invest fixed amount on monthly/yearly basis for a fixed return.Investors have options to invest in different type of mutual fund like. Debt funds, large cap equity funds etc. based on their risk appetites.
TenorIn PPF investors have to invest for minimum 15 years.There is no tenor for MF; investors can do it for any period. However, investors have to invest for minimum 6 month is they are investing in mutual funds via SIP.
ReturnReturns on PPF are fixed and are known to investors. The current interest rate is 7.6% compounded annually.Returns on MF are not fixed as they are market-linked. In last 10 years, equity mutual fund has generated a return of 12%-15% p.a. and debt mutual fund has given a return of 8%-9% p.a. The historical returns are not guaranteed in future.
LiquidityPPF is highly illiquid in nature. However, partial withdrawals are allowed after 7 years under certain circumstances.MFs offer high liquidity as compared to PPF. The money can be withdrawn anytime however investors may have to bear exit load, if applicable.
TaxationPPF has Exempt-Exempt-Exempt (EEE) status. Investments in PPF are tax deductible under section 80C of Income Tax. Accumulated amount and interest earned is also non-taxable at the time of withdrawal.ELSS: Investments in upto Rs 1.5 lakh are tax deductible under section 80C of Income Tax. Capital gains are taxable as per equity funds.
Equity Funds: 15% tax on capital gains if the holding period is less than 1 year and 10% tax on capital gains above Rs 1 lakh if the holding period is more than 1 year.
Debt Funds: Capital gains get added to the income of the investor if the holding period is less than 3 years and tax as per the investor’s tax slabs. 20% tax on capital gains after indexation if the holding period is more than 3 years.
RiskPPF is a safe investment product and there is no risk of capital loss.MF investments are risky as returns depend on market performance. However, the risk varies among various types of mutual funds. Debt mutual fund investments are less risky compared to equity mutual funds. Thus, investors can lose their invested capital.

(As told by Abhimanyu Sofat, Head of Research, IIFL Securities)

So what is better: mutual funds or public provident funds?
"Mutual funds definitely make a better investment choice over any asset class to fulfil one's financial objectives. It allows investors to diversify their portfolio depending upon their investment profile and objective. It gives a return which is inflation-adjusted over a long-term investment... Moreover, investing in mutual funds provides transparency," said Suren Kochhar, Chief Business Officer, Indiabulls Asset Management Ltd.

PPF is for the faint-hearted!
Investors with absolutely low or no risk appetite should consider investing in PPF, said Mr Kachroo. "The returns from PPF have come down over the past couple of years and inflation is around 6 per cent, so the actual returns would be around 2 per cent-2.5 per cent," he added.

"The most obvious reason an investor should invest in PPF is the tax benefit it offers. PPFs are ideal investment vehicles for investors who are risk averse and do not mind settling for a lower investment return. Mutual funds can often be volatile and risky but in the longer term they have consistently delivered superior returns in comparison to fixed income securities," said Rahul Agarwal, Director Wealth Discovery/EZ Wealth.

Invest according to what you can bear
Investors should invest as per their risk profile to generate better returns, said Abhimanyu Sofat, Head of Research, IIFL Securities.

So, as experts suggest, if you want higher returns but do not mind taking a bit of risk, go for mutual funds. But if you want assured returns, you should consider investing in public provident funds.