Last Updated on May 25, 2022 by Neera Bhardwaj

There are a plethora of investment options to suit any kind of risk profile that an investor may have. While the focus of investors has traditionally been to earn maximum returns, the right approach as professed by industry stalwarts is that the returns you earn from investments must compare with the kind of risk you are willing to take.

Two very popular long-term investments in India are Public Provident Fund (PPF) and mutual funds. While PPF offers a lower and fixed rate of income for the duration of investment, mutual funds offer market-linked returns. Let’s deep-dive into each and assess PPF vs mutual funds in detail.

What is PPF?

Public Provident Fund, or PPF as it is popularly known, is a fixed interest-earning, long-term investment that is offered by the Government of India. This means that you can open a PPF account with a bank or a post office, but the amount is ultimately deposited with the government. The minimum deposit is Rs 500 and the maximum is limited to Rs 1.5 lakh in a financial year. Once you open the account, you have to make at least one contribution in a financial year to keep the account active. You can deposit once or up to 12 times in one financial year. PPF has a maturity period of 15 yrs. 

The interest rate on PPF deposits is determined by the government. It is also reviewed every quarter. The current interest rate (for the quarter starting from 1 Jul 2021) is 7.1% per annum which is compounded annually.

Features of PPF

Here are some of the salient features of the PPF scheme:

  • Only resident Indian investors can open PPF accounts. Moreover, you can have only one PPF account in your name.
  • You can extend the investment tenure in blocks of 5 yrs after the minimum tenure of 15 yrs is over.
  • The loan against the PPF account balance is available between the 3rd and the 5th yr of investment. Partial withdrawals, on the other hand, are allowed after 6 completed years, once a year. 
  • PPF investment is an EEE instrument from a tax perspective. This means investment into the scheme is tax-free under Section 80C of the Income Tax Act, 1961. The interest earned, partial withdrawals and the amount received on maturity are also completely tax-free.

What is a mutual fund?

A mutual fund is a market-linked investment avenue that pools the investment of different investors and then invests this pooled corpus in different market-linked securities. The investment is done as per the investment objective of the mutual fund scheme and the portfolio is professionally managed by experienced fund managers of private organizations, mostly Asset Management Companies (AMCs). If the value of the underlying securities increases, you earn returns, and if the value reduces, you suffer losses.

Features of mutual funds

Here are some of the salient features of mutual fund investments:

  • Mutual funds come in different types. There are equity funds, debt funds, balanced funds, and others to choose from as per your risk appetite.
  • The minimum investment into the schemes usually starts from Rs 500. You can invest a lump sum or in instalments through SIPs. There is, however, no limit to the amount that you can invest.
  • Mutual funds are very liquid. Except for ELSS schemes which have a lock-in period of 3 yrs, you can withdraw from your investment whenever you want from most schemes. 
  • Returns depend on market movements and the type of fund that you have invested in. Equity funds are high-risk high-return schemes while debt funds have a low-risk low-return profile. Hybrid funds, on the other hand, mix both equity and debt and have a moderate risk-return profile.
  • Investment into ELSS schemes earns a tax deduction under Section 80C. Other schemes do not provide this tax benefit. Returns earned are called capital gains and they are taxed depending on the tenure to which the fund is owned.

PPF vs mutual fund – the difference

As is evident from the definition and features of each, PPF and mutual funds have certain differences.

Differences PPFMutual fund
Type of schemeFixed-income investmentMarket-linked investment
Market risksNilExposed to market risks
Minimum and maximum investment Minimum – Rs 500Maximum – Rs 1,50,000Minimum – Rs 100Maximum – no limit
Return7.1% compounded annuallyDepends on the type of scheme and market performance 
Tenure 15 yrs extendable by 5 yrs thereafterNo fixed tenure. You can invest for as long as you want
Loans and partial withdrawalsAvailable Not available. Any withdrawal from the scheme is considered as redemption
Liquidity Not very liquidHighly liquid. However, ELSS schemes have a lock-in period of 3 yrs
Tax benefit on investmentTax-free under Section 80COnly ELSS investments are tax-free under Section 80C
Tax benefit on returnsReturns are completely tax-freeReturns are taxed depending on the type of scheme and the tenure after which you redeem your investment

PPF vs mutual fund – which one should you choose?

Both the investment avenues have their respective pros and cons. Choosing between either depends on your investment needs and risk profile. You can choose PPF if:

  • You are risk-averse
  • You want guaranteed returns
  • You have a long-term investment horizon
  • You want to save the maximum amount of tax

On the other hand, mutual funds are suitable for you if:

  • You want exposure to the stock market but are not confident of making stock investments independently
  • You have the appetite and tolerance for the associated risks 
  • You want liquidity
  • You want inflation-adjusted and market-linked returns on your investments

Alternatively, you can choose to invest in both PPF and mutual funds to diversify your portfolio. While PPF investments would give you guaranteed returns, mutual fund investments would help in wealth creation with the potential of attractive returns. 

It is important to understand how PPF and mutual funds work. You can choose to include both mutual funds as well as PPF in your portfolio.

An investor needs to align their choice of investment avenues to their risk appetite, financial goals, investment horizon, and return expectation. Click To Tweet

This will offer not only diversification but also lend stability to your portfolio. Kindly conduct proper research before making decisions on portfolio investments.

Aradhana Gotur