Starting an investment journey is the first step to achieving your financial objectives. Investing allows you to grow the value of your saved money with the help of compounding. There are many investment options available for you if you have not started your investment journey yet. These include stocks, mutual funds, fixed deposits, bonds, government schemes, etc.
PPF (Public Provident Fund) and mutual funds are two common investment options in India. Investors often feel confused while choosing between these two options. Therefore, it is crucial to analyse the differences between PPF vs mutual funds. This blog provides comprehensive information on PPF and mutual funds, helping you make an informed decision. Choose the better investment option using the details below.
Understanding the Public Provident Fund
A Public Provident Fund (PPF) is a government-backed, long-term savings scheme available to every resident in India. This scheme is beneficial for those who want to invest in low-risk plans for their retirement. The PPF is managed by the government and provides fixed returns to fulfil the financial needs of Indians.
The funds invested in the PPF account have no connection to the securities market. PPF can provide fixed and guaranteed returns on your investment annually, completely avoiding the risks of the securities market. It also offers a variety of tax benefits, including tax deductions on contributions and tax exemption upon maturity. They have a minimum lock-in period of 15 years.
Procedure of Investing in PPF
You can start investing in PPF to get guaranteed returns. The below steps guide you to make investments in PPF:
Step 1: You have the option to deposit the amount via cash, cheque or demand draft. You must submit a PPF deposit challan or Form B.
Step 2: Start filling out the form, which includes a main section and two counterfoils if you are investing directly. Enter your name, address, PPF account number, investment amount, and details.
Step 3: Let the teller stamp the form and hand over your counterfoil to you. You must also update your passbook.
Step 4: If you want to deposit a cheque, your passbook will be updated once it is released. However, if you deposit cash, the bank will update the passbook instantly.
Understanding Mutual Funds
Mutual Funds are one of the most used securities all over the world. It gathers capital from numerous investors to purchase a variety of securities, including stocks and bonds. The units of the fund are portions of a fund’s total assets.
Experienced fund managers manage these funds depending on the fund’s goal and market condition. The main advantage of investing in a mutual fund is that investors can gain exposure to the capital market without requiring extensive knowledge or skills. Moreover, they can easily redeem the units of open-ended funds schemes on any business day.
How to Invest in Mutual Funds?
Once you have understood the overall purpose of investing in mutual funds, you must find a suitable mutual fund scheme to invest in. Follow the below steps to invest in mutual funds:
Step 1: Investing in mutual funds starts with the procedure of risk profiling, which is essential for choosing a particular scheme for yourself.
Step 2: Once you are done with the risk profiling, proceed with the asset allocation process, where you must divide your money between various asset classes. You should have a mix of equity and debt instruments in your portfolio to balance risks and returns.
Step 3: Identify funds that invest in each of your chosen asset classes. Now, check the past performance of each fund and their expenses to know if they are an appropriate choice.
Step 4: Invest in your chosen funds by making an application either online or offline.
Step 5: Start investing in the mutual fund scheme and diversify your investments to ensure higher ROI.
You can also use Torus Digital to invest to avail the best mutual funds schemes. Using Torus Digital, you can also open a free Demat account, which can offer you SIPs starting from only ₹100.
What are the Key Differences Between PPF and Mutual Funds?
Investors often expect high returns, low risk, and tax savings from any investment. However, every investment option has its strengths and weaknesses.
The table below highlights the key differences between Mutual Funds vs PPF, helping you understand which is the better option:
| Factors | PPF | Mutual Fund |
|---|---|---|
| Investment Duration | Investment in PPF schemes includes a lock-in period of at least 15 years. Investors can access the accumulated funds after the completion of 15 years. | Mutual funds do not have a particular investment tenure in mutual funds. For instance, investors can invest for three months or five years according to their needs and goals. |
| Expected ROI | Investors can earn up to 8% while investing in PPF. These returns are fixed like fixed deposits. Investors do not have to take risks to earn a positive return on investment (ROI). | ROI in mutual funds is not fixed and can vary between each fund. Based on the type of fund and market conditions, investors can earn ROI within a range of 7% to 15% per annum. |
| Anticipated Risks | Investing in a PPF scheme does not create any risk for you since it is a government-backed scheme that offers fixed returns. | Mutual fund schemes are subject to market risks, which can affect the overall performance of the fund.
Inventors can face both profit and loss in terms of ROI. |
| Diversification | Investing in PPF allows investments in only instruments that offer fixed returns. | Portfolio diversification is one of the best features of investing in mutual funds. Different types of funds invest investors’ money in different types of securities. |
| Tax Savings | Investing in the PPF scheme is tax-deductible up to a limit of ₹1.5 lakhs under Section 80C of the Income Tax Act. The investment corpus after the maturity period is also exempt from tax. | Tax implications in mutual funds schemes depend on the investment type and tenure. Only the Equity-Linked Savings Scheme (ELSS) offers a tax deduction of a maximum ₹1.5 lakh yearly under Section 80C of the Income Tax Act. |
In what conditions are PPFs better than Mutual Funds?
If you are considering a secured investment option with a fixed ROI, PPF can be a better investment option when comparing mutual funds vs PPF. It is considered a risk-free investment option rather than a mutual fund, which is subject to market risks, and returns can fluctuate.
In what conditions are Mutual Funds better than PPFs?
Although a mutual fund is a bit riskier option while analysing mutual fund vs PPF, it allows you to get higher returns. You can also withdraw your investment amount whenever you want since there is no lock-in period (with the exception of the Equity Linked Savings Scheme). You cannot get this benefit while investing in PPF as it has a lock-in period of 15 years.
Which is the better option among Mutual Funds and PPF?
Based on the comparison of PPF vs mutual funds, PPF is the better option if you are looking for a risk-free investment for your retirement. The difference between mutual funds and PPFs also shows that if you want higher returns and do not mind carrying risks, you may choose a mutual fund scheme instead of a PPF.
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