PPF or SIP? Which will be a better option for investment?

People often ask me, PPF vs SIP which is a better choice?

SIP means Systematic Investment Plan. It is an investment strategy offered by mutual funds to investors. An SIP allows an investor to invest small amounts of money regularly rather than investing a single large amount.

Public Provident Fund (PPF) is a Savings cum tax-Savings Scheme introduced by the National Savings organization of India in 1968. Once a person enrolls for PPF, he has to invest some amount in the scheme every year for 15 years. The invested amount earns interest and helps in building wealth.

Who should worry about PPF vs SIP?

This is applicable to those people who can invest small amounts on a regular basis. Such people usually have four investment avenues.

• Save cash every month in Savings Account.
• Open a Recurring Deposit account and start saving regularly.
• Open a Public Provident Fund (PPF) account and start investing regularly.
• Start a Systematic investment plan (SIP) with a good equity Mutual Fund.

Investing in PPF

Minimum subscription of Rs.500/- and maximum of Rs.1, 50,000/- can be made in lumpsum or in 12 installments per financial year. The duration of the account is 15 years and the account can be continued for one or more blocks of 5 years without loss of interest on written request within 1 year from the date of maturity. But the best way to invest is to put in the full amount of Rs. 150,000 on or before 5th April of each year.

The depositor is eligible for a loan in the third financial year from the financial year in which the account was opened. Loan up to 25% of the balance amount standing at the credit of the account at the end of first financial year can be availed. Loan is repayable in 36 months. The rate of interest on the loan shall be at 2% per annum above the PPF interest rate.

Calculation of PPF amounts for a new account.

Investing in Mutual Fund via SIP

Every time you invest money, additional units of the scheme are purchased at the market rate and added to your account. Hence, units are bought at different rates and investors benefit from Rupee-Cost Averaging and the Power of Compounding.

With volatile markets, most investors remain skeptical about the best time to invest and try to 'time' their entry into the market. Rupee-cost averaging allows you to opt out of the guessing game. Since you are a regular investor, your money fetches more units when the price is low and lesser when the price is high. During volatile period, it may allow you to achieve a lower average cost per unit.

When one has long term goals, like daughter’s education or son’s marriage or retirement planning (10+ year horizon), one is looking at returns, safety and potential for wealth building. For these kind of scenarios, an SIP in a good equity mutual fund is very good option.

SIP vs PPF – Tax Aspects

SIP

• An SIP in ELSS (Equity Linked Saving Scheme) is elgible for deduction under Section 80C.
• Long-term capital gains in equity SIP are not taxable.

PPF

• Interest in PPF is tax free.
• Investment in PPF qualifies for tax-deduction under Section 80C.