Mutual Funds vs. PPF: Know the Difference

5 mins read

Whenever an individual decides to invest his money, he considers his risk appetite, the period for which he can invest, the returns he expects, and the amount he wants to invest. Luckily, the investment scenario in India is comprehensive and varied, offering those willing to invest with a myriad of options to choose from.

Mutual funds and Public Provident fund (PPF) are two such popular different options available to choose from. Both instruments have their own set of advantages and disadvantages.

Mutual Funds vs. PPF

A mutual fund is a financial vehicle where the fund house gathers a pool of money of many investors and invests this money in a portfolio of securities such as stocks, bonds, etc. Mutual funds have a fund manager actively selecting holdings by mixing and matching to build a portfolio that gives the best possible return. There is an option of online mutual funds as well.

Public Provident Fund (PPF) is a long-term investment scheme created and managed by the Central Government of India to help individuals save a part of their income and encourage them to do retirement planning and saving to build a retirement corpus.

These two products are varied and have a specific nature of their own. To understand the key differences between mutual funds and PPF, let’s dive in further and explore their nature and functionality in various parameters.

Different Investment Types

AMCs create mutual funds. A person investing in a mutual fund does not trade in different stocks; instead, he invests in the mutual fund company itself, which curates this stock portfolio in the form of a scheme for them. The government creates PPF to make the citizens privy to savings and also provides good tax benefits.

Lock-in period and maturity period

Mutual funds give the investors the option to exit at any point in time apart from close-ended funds where the lock-in period is predetermined, whereas the PPF has a fixed lock-in period of 15 years which blocks the money for the long term.

PPF offers the option of extending its tenure in blocks of 5 years upon maturity post their 15 years lock-in period. Other than close-ended mutual funds, one can exit a mutual fund scheme by selling their mutual fund holdings.

Reasons to invest

Mutual funds can be long cap, medium cap, and short cap, depending on the market capitalization of the stock holdings of the scheme. This provides the investor with various options to choose from according to their risk and return suitability.

Over a period of 15 years, PPF ensures a saving corpus to the investor. It is a long-term small savings plan.

Return on investment factor

Mutual funds give different returns on investment depending on the underlying asset and if the scheme is active or passive. The mutual fund fund manager plays a crucial role in getting a good return on investment as he actively selects the stocks in the portfolio. However, the market movements decide the return on investment in the case of mutual funds.

PPF follows a very different strategy compared to mutual funds as it gives a fixed return with the government’s guarantee to the investors. There is complete safety of the invested capital. It provides returns on an annual basis, and the interest rate on PPF is declared quarterly by the central government. The current rate of PPF is 7.1%

Tax codes and Tax benefits

Tax benefits associated with a mutual fund depend upon the mutual fund scheme availed by the investor and the term period of that scheme. PPF, on the other hand, has fixed guidelines framed by the government for availing tax benefits. The final amount of a PPF that an individual gets when the PPF reaches maturity is exempt from tax. Apart from that, under Section 80C, as clearly stated in the Income Tax Act, 1961, PPF investments up to Rs 1,50,000 are tax-free each financial year. Though the interest on PPF must be declared when the income tax return is filed, it is tax-free.

Risk factor analysis

Mutual fund risks depend upon market volatility in fluctuations in the price of the stocks consisting of the mutual fund portfolio. The long cap mutual funds are spread across a longer-term and are less risky than medium and small-cap. Medium and small-cap funds follow a more aggressive investment strategy. This enables the investors to invest based on their risk appetite.

Liquidity of your choice

Mutual funds offer a high level of liquidity where one can exit whenever one wants. Close ended funds have a 3 to 5 years of maturity period from the start of their tenure. PPF has a much lower level of liquidity as compared to Mutual funds. A PPF policyholder can take 25% of the balance through a loan from the PPF. PPF also offers partial withdrawal after six years from when the initial subscription started.

Portfolio Diversification

Mutual funds can have a diversified portfolio consisting of money market instruments, fixed income securities, equity mutual funds in various fixed, hybrid, debt, etc. PPF, which comes with a government guarantee, is very low risk and mainly invests in fixed income instruments that help the government provide reasonable returns for a long-term purpose.

Bottom Line

Whether an investor should opt for a mutual fund or PPF would depend on the investor’s risk appetite, investment amount, and, more importantly, the investor’s financial goals and how the instrument fulfills them.

The PPF is a safe fixed long-term option, while mutual funds have various suitable schemes one can invest in. Understanding each instrument, lock-in and withdrawal periods, instrument scheme thoroughly, and calculating the approximate returns could help an investor decide between them. Another option can also be to make investments in both and diversify your investment portfolio according to your financial plans.