Making the Choice: PPF Versus ELSS Mutual Funds

The public provident fund (PPF) is a savings and investment scheme that allows an individual to meet various long-term financial goals such as a retirement corpus.  The equity-linked savings scheme (ELSS) is a category of open-ended mutual funds that invest in equity or the stock market. 

Currently, PPF provides returns at an interest rate of 7.1% per annum.  However, ELSS mutual funds provide no fixed returns as such. The returns could vary as per the mutual fund scheme. 

An individual can get a tax exemption for money put into a PPF account, which has a limit of up to Rs 1.5 lakh, under Section 80C of the Income-tax Act (ITA), 1961. In addition, the interest earned from a PPF investment is not taxed as well. Also, the money that is paid out on maturity is not taxed either.

While investment in PPF is tax-free, ELSS schemes are tax-exempt up to Rs 1.5 lakh in a financial year. However, as per the period of investment, investors are liable to pay short-term capital gains (STCGs) tax at 15% or long-term capital gains (LTCGs) tax at 10%.

Being a government-backed scheme, PPF is an extremely low-risk investment. On the other hand, considering ELSS mutual funds invest in stocks and other equity securities, these are exposed to market risks.

While the lock-in period for the PPF is for 15 years, for ELSS it is only three years. In PPF, an investor can extend the tenure by five years thereafter. In the case of ELSS, an investor has the discretion to retain the money for a longer duration.

For PPF, the government determines the fixed interest rate on a quarterly basis. ELSS mutual funds are invested in stocks, they are susceptible to the highs and lows of the stock market.

Historically, top-performing ELSS mutual funds, the top 10, have provided better returns as compared to PPF on a long-term basis.

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