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SIP or Systematic Investment Plan is a method of investing in mutual funds. You can invest a fixed amount every month in a mutual fund through SIP. The regular investment strategy averages out your purchase price and protects you from inadvertently catching a market peak when you invest. A SIP also gives you more mutual fund units, when the fund price drops.
PPF or Public Provident Fund is a government-guaranteed savings scheme. The returns are fixed but 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 Q3 (October-December) FY 2024-2025 has been fixed at 7.1%.
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Difference between SIP and PPF
| Parameters | PPF | SIP |
| Returns | 7.1% (Q3 of FY 2024-25) | *Market linked |
| Investment Instrument | A part of Government borrowings and installed as per govt. requirements | Mutual Funds |
| Investment Amount | Minimum- Rs. 500 | Maximum- Rs. 1.5 lakh p.a | Minimum Rs.500 per month | No max. limit |
| Investment Tenure | 15 years (minimum) | Extendable in blocks of 5 years | Can be as low as 6 months or as high as 20 years |
| Lock-in Period | 15 years | No lock-in period |
| Investment Risk | It is a government-backed scheme. Hence, completely secure | Risky as SIP is market-linked |
| Tax Benefits | EEE (Exempt-Exempt-Exempt) category of tax | Depends on the type of Mutual Fund. Ex: ELSS is eligible for tax deduction under Section 80C |
| Liquidity | Low | Withdrawals allowed only from 7th financial year of investment | High | Investments can be redeemed at any point in time |
*High return potential when funds are held for the long term
PPF Calculator – PPF Interest Rate, Loan, Maturity & withdrawal Calculator
SIP vs PPF: A Comparison
1) Safety
PPF is a government-backed savings instrument. The money deposited in 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 variations in prices of stocks held by the fund. Debt funds also move up and down in value due to changes in bond prices.
However, mutual funds promise higher growth potential in the long run. Volatility is the price that investors pay for tapping the long-term growth potential. Further, investment in mutual funds through SIP will reduce the market risk and volatility, by spreading your investment over time, but the risk is not entirely eliminated.
2) Returns
The returns on PPF are fixed and guaranteed by the government. The exact rate is set every quarter. Historically rates have fluctuated around 8% per annum. Here is a brief history of PPF rates :
| Period | Interest Rates |
| July to September 2024 | 7.1% |
| April to June 2024 | 7.1% |
| January to March 2024 | 7.1% |
| October to December 2023 | 7.1% |
| July to September 2023 | 7.1% |
| April to June 2023 | 7.1% |
| January to March 2023 | 7.1% |
| October to December 2022 | 7.1% |
| July to September 2022 | 7.1% |
| April to June 2022 | 7.1% |
| January to March 2022 | 7.1% |
| October to December 2021 | 7.1% |
| July to September 2021 | 7.1% |
| April to June 2021 | 7.1% |
| January to March 2021 | 7.1% |
| October to December 2020 | 7.1% |
| July to September 2020 | 7.1% |
| April to June 2020 | 7.1% |
| January to March 2020 | 7.90% |
| October to December 2019 | 7.90% |
| July to September 2019 | 7.90% |
| April to June 2019 | 8.0% |
| January to March 2019 | 8.0% |
| October to December 2018 | 7.8% |
| July to September 2018 | 7.8% |
| April to June 2018 | 7.9% |
(Source: National Savings Institute)
On the other hand, the returns of mutual funds are market-linked. It varies as per the market conditions as well as the performance of the fund manager. The returns of a few of India’s largest funds are mentioned below. The returns are calculated by taking 5 years with SIPs starting on May 1, 2014, and ending on May 1, 2019.
| Fund | SIP Return |
| Aditya Birla Sun Life Frontline Equity | 9.60% |
| Kotak Standard Multicap Fund | 13.29% |
| HDFC Top 100 Fund | 11.73% |
| ICICI Balanced Advantage Fund | 10.22% |
| SBI Small Cap Fund | 15.83% |
(Source: Value Research, All plans are Direct Plans)
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3) Liquidity
PPF deposits have a lock-in period of 15 years. Whereas your investment in mutual funds (open-ended) can be redeemed on any business day. The flexibility of redeeming your funds as per the requirement makes mutual funds investment much more liquid than PPF deposits.
In the case of PPF, you can take a loan against your PPF deposits but only from 3rd to 6th year of account opening. You can also make a partial PPF withdrawal after the end of 6th financial year i.e. beginning of 7th financial year from the year of account opening. However, it is suggested that one should check with the respective website of the bank to determine when the partial withdrawal is allowed. Some banks, such as ICICI and Axis, allow withdrawals after 5 years and some after 7 years (SBI and HDFC)
Like PPF, you can also take a loan against your mutual fund holdings to meet any short-term needs. However, loans against mutual funds can be costlier due to the higher interest rate and processing fee.
Further, mutual fund houses 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 investment in these funds before the expiry of the term.
4) Taxation
Investment in the PPF account for a tax deduction up to Rs 1.5 lakh per annum under Section 80C 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.
Returns on mutual funds are taxed as per the type of mutual fund scheme and investment tenure. 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 80C. However, this does not apply to other mutual fund categories. The taxation of mutual funds is as follows:
| Type of Scheme | Particulars | Short Term Capital Gains Tax | Long Term Capital Gains Tax |
| Equity-oriented schemes | Holding Period | Up to 12 months | More than 12 months |
| Tax Rate | 15% | 10%* | |
| Non-equity oriented schemes | Holding Period | Up to 36 months | More than 36 months |
| Tax Rate | Income Tax Slab Rate of Investor | 20% after indexation |
*Long-term capital gains on equity mutual funds are exempt up to Rs. 1 lakh per annum. For example, if your long-term capital gain in FY 2018-19 is Rs 1.5 lakh, only Rs. 50,000 will be taxable as LTCG.
In case of SIPs, the taxation of mutual fund gains is based on the ‘First-in-First-out’ (FIFO) principle. Units which are purchased first are assumed to be redeemed first when you put in your redemption request and gains are taxed accordingly.
Also Read: How Mutual Fund Investment is Taxed?
What Should You Choose?
While it is difficult to compare a market-linked product with a fixed income one, investment in PPF is recommended for absolutely risk-averse individuals. Investors who are willing to take a moderate risk to earn higher returns can invest in mutual funds. The moderate risk can even further be minimized by investing through a long term SIP route in mutual funds.
Further, PPF investment scores low in terms of liquidity because of a 15 year lock-in period. Tax benefits can be availed both in PPF as well as ELSS category of mutual funds under section 80C. The only advantage in case of PPF tax treatment is unlike mutual funds, PPF returns as well as maturity amount are also tax-exempt.
However, historical data suggests that a 15-year mutual fund SIP in an average fund can give you 1.5 times returns than PPF which makes it very attractive in terms of returns and liquidity.