When it comes to investing, many people are likely to be unaware of the various investment options open to them. Systematic Investment Plans (SIPs) and Public Provident Fund (PPF) are two such investments which belong to different asset categories. Both PPF and SIP are suited to fulfill long term financial goals. However, each of these investments is accompanied by certain features with regards to the risk it involves, the returns it provides, the liquidity it offers, the term for which the investment must be made and several other factors. Given below is a brief comparison between SIPs and PPF on the basis of few such factors to allow you to decide which one best addresses your financial goals. But first, we must begin by understanding what is SIP and PPF.
About Systematic Investment Plans (SIP)
Systematic investment Plans, popularly known as SIP, is a process which allows investors to invest in mutual funds. Under an SIP, investors make regular investments of a pre-decided amount, usually small, into mutual funds on a regular basis (quarterly, monthly) instead of making a high value investment in one go. Hence, SIPs are a convenient and flexible investment plan which not only help inculcate the habit of saving but also allow for disciplined saving which reaps long term gains.
About Public Provident Fund (PPF)
Public Provident Fund, also known as PPF, is a long term investment scheme which was introduced by the Government of India under the Public Provident Fund Act, 1968. PPF has been a popular choice of investors as it is a relatively more conservative form of investment which helps lend balance to one’s portfolio. Backed by the government, it is a relatively safe investment which also yields fixed but attractive returns which are tax free. A PPF account can be opened for a minimum term of 15 years and with a minimum initial deposit of Rs 500. The maximum deposit which can be made into the account is fixed at Rs 1,50,000 which can be made either as a lump sum or in 12 installments on a yearly basis. Once the tenure of the PPF is over, investors have the option of withdrawing their returns of re-investing the same for an additional period of 5 years.
| SIP | PPF | |
|---|---|---|
| Product Structure | Systematic Investment Plans or SIPs are investments styled on mutual funds which allow investors to invest small amounts of money on a regular basis, rather than having to make a larger lump sum investment in one go. Once the investment is made, the investor will receive units of the mutual fund n a regular basis which depends on the Net Asset Value (NAV), which is the prevailing price of the fund. Each month, the investor will receive a different number of units of the mutual fund, depending on the change in the Net Asset Value (NAV). Hence, when the NAV is low, the investor will receive a higher number of units, but when the NAV is high, the number of units will automatically go down. | Under PPF, investors are allowed to put in a maximum amount which is fixed at Rs 1.5 lakh. Investors have the option of making a yearly lump sum investment or invest via 12 installments in a year. Once the PPF term of 15 years is over, investors will receive the principal invested amount along with the accrued interest. |
| Returns on Investment | The returns received in SIP investments are linked to the equity market performance and asset allocation strategy, depending on the scheme opted for by the investor. | Interest in PPF investments is calculated on an annual basis and credited to the account at the end of each year. Calculation of interest is done each month on the basis of the lowest account balance between the 5th and last date of the month. Returns offered on PPF investments are fixed and the same is determined at the time of account opening. The rate of interest is subject to change during the investment period depending on any change in the government policy governing PPF accounts. |
| Investment Objective | SIP are ideal long term investments for the younger working generation. They are also suitable for fulfillment of long term goals like marriage or retirement planning. They are relatively safe and hold a robust potential for wealth accumulation. | PPFs are also ideal long term investments which are done for a minimum period of 15 years or more. Hence, it is far more suited as a retirement investment. It is also a helpful investment option for young parents who wish to start savings towards their child’s future like education or marriage 15-20 years in the future. |
| Tax Benefit | SIPs may be taxable depending on the rules governing taxation on mutual fund investments. For instance, an SIP in ELSS i.e. Equity Linked Saving Scheme will be eligible for tax deduction under the provisions of Section 80C. However, long term capital gains earned on mutual fund equity schemes will be tax free. | All returns, including interest, received from PPF investments are totally tax-free under Section 80C. Furthermore, investors will continue to get a tax deduction up to the amount of Rs 1.50 lakh under the PPF tax provisions. |
| Tenure of Investment | You can choose the time period for which you wish to invest in the SIP. It can be as low as 6 months, 1 year, 5 years, 10 years, 20 years, or you can chose to invest perpetually until you wish to no longer to continue the investment. | The minimum tenure to invest in a PPF is fixed at 15 years. After the expiry of this term, you can either choose to withdraw the returns or can even renew the investment for a further 5 years on every renewal. |
| Liquidity Offered | One of the primary advantages offered by Systematic Investment Plans is the liquidity which they offer. If you have invested in an SIP, you have the freedom of stopping your investment at any point of time and you can redeem the shares within a short period of 1 or 2 business days. However, some penal charges may apply. | One of the main disadvantages of PPF investments is that they offer very low liquidity. Since it is long-term investment, investors will only be allowed to withdraw the invested money after the 7th year from the date on which the investment has commenced. |
| Level of Risk | Compared to PPF, SIPs carry a higher level of risk as they are linked to the equity market performance. Therefore, returns received on SIP investments tend to be variable, depending on the market performance. However, SIP have been one of the better performing investments in the long term yielding high returns for investors. | PPF, on the other hand, is a very safe investment which is characterized by guaranteed returns, considering that it is backed by the government and offers fixed returns. The rate of interest is pre-determined and may change only if there is a change in the government policy governing PPF during the period of investment. |
| Lock-in Period | One of the main advantages of SIP is that they do not have a lock-in period. Investors are free to stop the investment at any time, following which they can withdraw their investment at any time. | PPF investments come with a lock-in period of 15 years, which is otherwise the term of the investment. |
Disclaimer
Mutual Fund investments will be subject to market risks. Any mutual fund listed in the document does not guarantee fund performance or its underlying creditworthiness. Please do read the mutual fund document thoroughly before investing. Specific investment needs and other factors have to be taken into account while designing a mutual fund portfolio.
GST rate of 18% applicable for all financial services effective July 1, 2017.
