PPF or Public Provident Fund is a government supported savings scheme. It has a fixed return which is set by the government every quarter. You can open a PPF account with the post office or most major banks. The PPF interest rate for July – September 2018 is 7.6% and the PPF interest rate for October – December 2018 is 8%.
Mutual Funds are investment vehicles that pool the money of several investors and invest it in equity and debt. The returns of mutual funds vary according to market conditions and fund manager performance. You can invest in mutual funds after completing your KYC. You can do this offline by submitting your purchase forms and cheques to the fund house or online through companies like Paisabazaar. On this page, we will compare the two as investment products :
| Criterion | PPF | Mutual Funds |
| Safety | High | Low |
| Returns | Moderate | High* |
| Liquidity | Low | High |
| Taxation | Fully exempt | Low rates** |
*High return potential when funds are held for the long term. **Tax rates fall to 10-20% when equity and debt funds are held for longer than 1 year and 3 years respectively.
PPF Vs Mutual Funds: Comparison, Returns
1) Safety
PPF is a government backed savings instrument. The money collected by the 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 fluctuating share prices. Debt funds also move up and down in value due to changes in bond prices. However mutual funds also have the capacity to build wealth over the long run. Volatility is the price that investors pay for this potential.
2) Returns
The returns of PPF are fixed and guaranteed by the government. The exact rate is set every quarter. Historically rates have fluctuated around 8% per annum. The PPF interest rate for October-December 2018 is 8%. Here is a brief history of PPF rates :
| Period | Rate |
| July – September, 2018 | 7.6% |
| April – June, 2018 | 7.6% |
| January – March, 2018 | 7.6% |
| October – December, 2017 | 7.8% |
| July – September, 2017 | 7.8% |
| April – June, 2017 | 7.9% |
| January – March , 2017 | 8.0% |
| October – December, 2016 | 8.1% |
| July – September, 2016 | 8.1% |
| April – June, 2016 | 8.1% |
| April 2015 – March 2016 | 8.7% |
| April 2014 – March 2015 | 8.7% |
| April 2013 – March 2014 | 8.7% |
| April 2012 – March 2013 | 8.8% |
| December 2011 – March 2012* | 8.6% |
| April 2011 – December 2011 | 8.0% |
| April 2010 – March 2011 | 8.0% |
| April 2009 – March 2010 | 8.0% |
| April 2008 – March 2009 | 8.0% |
Source: National Savings Institute
On the other hand, the returns of mutual funds fluctuate according to fund manager performance and market conditions. Here are the historical returns of a few major fund categories :
| Fund Category | 1 year return | 3 year return | 5 year return |
| Equity Large Cap | 16.5% | 13.7% | 18% |
| Equity Mid Cap | 9% | 13.3% | 28.7% |
| Equity Small Cap | 7.4% | 15.7% | 30.2% |
| Equity ELSS | 11.5% | 13.7% | 22% |
| Hybrid (Balanced) | 7.6% | 9.9% | 14.2% |
| Debt Liquid | 6.9% | 7% | 7.9% |
Source: Value Research, Data as on 03/09/2018
3) Liquidity
PPF accounts have a term of 15 years. You can make partial withdrawals after the expiry of 5 years from the year of account opening. However this is capped. The maximum amount that can be withdrawn per financial year is the lower of following :
- 50% of the account balance as at the end of the financial year, preceding the current year, or
- 50% of the account balance as at the end of the 4th financial year, preceding the current year.
You can also get a loan against the balance in the PPF account from the 3rd to the 6th year after account opening. The maximum amount of loan that can be availed against PPF accounts is 25% of the balance at the end of the 2nd financial year preceding the year in which the loan was applied for.
Most mutual funds are open ended and you can withdraw your money from them on any business day. Mutual Funds 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 invest in these funds before the expiry of the term.
4) Taxation
Investment in the PPF account up to Rs 1.5 lakh per annum gets you a tax deduction under Section 80 C 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.
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 80 C. However this does not apply to other mutual fund categories. Returns on mutual funds are taxed according to fund category and how long the fund is held. The taxation of mutual funds is as follows:
|
Holding Period |
Debt Fund |
Equity Fund |
| Short Term | At slab rate | 15% |
| Long Term | 20% (with indexation) | 10% (with 1 lakh exempt) |
The holding period for an equity fund to fall in the long term category is 1 year and for a debt fund to fall in the long term category is 3 years. Indexation lowers the effective tax rate by factoring in inflation.