What is better: PPF or SIP?

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Savings and investment can be confusing for some of us. Where should you put your money when investment options are abound? For most people, choosing between PPF and SIP can be difficult. Both are attractive saving instruments. So, can it be made simple? Yes. Through a detailed comparative analysis, we can help you come to a better decision in this matter.

What are PPF and SIP?

To begin with, let us look at what PPF and SIP are.

Public Provident Fund (PPF) is a government scheme that helps you save up against a target, such as retirement, children’s wedding, health care and so on. Systematic Investment Plan (SIP), on the other hand, is a monthly payment made as investment in mutual funds.

PPF is a fixed income investment and the returns are steady. As it is regulated by the government, the risk is more or less negligible. Moreover, it has a fixed tenure of 15 years from the opening date. This feature especially makes PPF ideal for middle-aged investors trying to lay down a foundation on their retirement plans. To check what your PPF amount might look like, go to a PPF Calculator.

Another advantage of PPF investment is that it allows you to nominate one or more individuals who can inherit your provident fund after you. There is also a facility where you can avail loans from the fund.

As the name suggests, Systematic Investment Planis a systematic way to invest in mutual funds. It ensures that you invest regularly and stay invested over a desirable period of time. One can say there are two steps on the way to start investing through SIP: see which are the best mutual funds for SIP, and then figure out which is the best SIP to invest in. Go to an online SIP calculator to check your SIP amount.

SIP vs. PPF

Although these are similar in a variety of ways, SIP and PPF drift away from each other in certain aspects.

Risk: SIP and PPF differ in terms of risk. As PPF is managed by the government, the risk is minimal. Mutual funds have greater risk because they are subject to the fluctuations in the market. Different mutual funds come with different levels of risk and returns. Mutual funds like debt funds are as safe as PPF in terms of risk, yet have a slightly higher percentage of returns.

Returns: PPF gives steady returns at a fixed percentage. As for mutual funds, they are popular for increased returns that come with risk slightly higher than that of devices like PPF. Different mutual funds give different percentages of returns. How much returns you earn depends equally on the investor as well as the mutual fund house. That is why it is important to choose the best mutual fund to invest in that will give better returns at less expense ratio.

Liquidity: As opposed to PPF, SIPs can be cancelled at any point of time and sold at the investor’s discretion. PPF has a tenure of 15 years during which your money is locked up in the fund. There is a provision for early withdrawal, but it is not as easy and fast as selling mutual fund units. Best SIP plan to invest in gives one the leeway to invest in small amounts according to one’s convenience.

Taxes: PPF returns are not subject to taxation. On the other hand, income from mutual funds are taxed as income from capital gains. Having said that, one must also add that considering the higher returns from mutual funds, there may be a sizeable difference in terms of tax paid and returns earned.

We merely compared facts here. The decision to choose one or the other should be entirely of the person who is investing. Take care to include factors mentioned above into consideration while planning your financial cruise.