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SIP Vs. PPF: Which Is A Better Investment Option?

Introduction

Many people probably aren’t aware of all the available investment options when it comes to investing. Two such investments that fall under distinct asset classes are Systematic Investment Plans (SIPs) and the Public Provident Fund (PPF). Both PPF and SIP are ideal for achieving long-term financial objectives. But each of these investments has its own risks, returns, liquidity, time frame, and other factors.

What Are Mutual Funds?

A mutual fund is a collection of funds that are professionally managed by a fund manager. It is a trust that accumulates funds from numerous participants who have similar investment goals and invests those funds in stocks, bonds, money market instruments, and/or other securities. A fund manager who has appropriate industry experience manages the fund and makes investments on investors’ behalf.

What Is A Systematic Investment Plan (SIP)?

In general, a mutual fund gives investors the additional flexibility to invest money consistently on a monthly, quarterly, semi-annual, or even annual basis, depending on their preferences and the fund’s type. This is referred to as a systematic investment plan (SIP). In this way, it helps instill a sense of financial discipline and savings while remaining affordable.

What Is The Public Provident Fund (PPF)?

A Public Provident Fund is one of the oldest and most traditional savings options available since the beginning of time. A PPF is a safe haven introduced by the Indian government and governed by the Public Provident Fund Act of 1968. It is a tax-saving scheme meant to assist in the building of a retirement fund. The main objective of a PPF is to provide steady returns over the long term for investors. The amount contributed, interest earned, and returns generated are not taxable, classifying them as Exempt-Exempt-Exempt (EEE).

The Difference Between a Systematic Investment Plan (SIP) and Public Provident Fund (PPF)

The following are the main differences when comparing SIP and PPF:

Particulars SIP PPF
Type A SIP is a method of investing in which a small amount is invested in a mutual fund on a regular basis, as opposed to a lump sum investment. The money is used to purchase mutual fund units depending on their current Net Asset Value (NAV). Generally, there is no maximum investment amount limit. The maximum amount that can be invested in a fiscal year is Rs. 1,500,000. This investment can be made completely at once or in 12 equal installments.
Returns Since SIPs invest in mutual funds, the returns are also based on how well those funds perform in accordance with the current market-linked returns. The returns are calculated on an annual basis.  The returns and the rate of return are both fixed at the time the account is opened. The government determines the interest rate.
Objective Mutual fund SIP investments are excellent for all short-, medium-, and long-term goals. They are perfect for achieving goals and building wealth. A PPF is excellent for investments with a duration of 15 years or more. As a result, it may be a great option for retirement planning, financing your children’s education, or getting married.
Tax Benefits Mutual fund SIP investments are subject to both short-term and long-term capital gains taxes. According to Section 80C of the Income Tax Act of 1961, however, investing in an Equity Linked Savings Scheme (ELSS), however, may enable investors to deduct up to Rs. 1,50,000 off their invested amount. Falls under Exempt, Exempt, Exempt (EEE), meaning that along with a tax deduction on the invested amount up to 1,50,000 as per Sec 80C of the Income Tax Act, 1961, all returns and interest earned under a PPF program are exempt from tax.

 

 

Tenure Under a SIP, investors have the choice of any investment duration. It may be six months, one, five, ten, fifteen, twenty years, or even longer. The minimum investment tenure for a PPF is 15 years, and after the first investment matures, investors can extend it further in blocks of 5 years.
Lock-in Period Mutual fund SIP investments generally do not have a fixed lock-in period. Only ELSS has a three-year lock-in requirement. A PPF’s lock-in period is 15 years.
Flexibility Usually, a SIP provides complete liquidity for withdrawals from an investment plan. Generally, within three business days, the complete mutual fund amount will be credited to the linked bank account Since it is a long-term investment, partial withdrawals are permitted only after the sixth year from the policy’s inception date.
Risk Mutual funds involve a significant amount of risk because their returns are based on market factors. A mutual fund’s high rate of return serves to offset this. A PPF is a very safe form of investment that offers set returns that are guaranteed. The risk is completely borne by the government.

Conclusion

While it can be challenging to compare a fixed-income product with a market-linked one, investing in PPF is recommended for those who are risk-averse. Mutual funds are a good option for investors who are willing to assume a moderate level of risk in exchange for higher returns. Investors can calculate the returns with the help of the Kuvera SIP calculator.

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