PPF and Mutual Funds are legitimate financial assets. However, they are very different in terms of risk return perspective. tenure of investment and ease of investment.
Public Provident Fund (PPF): Government of India started PPF (Public Provident Fund) through the enactment of PPF Act, 1968. Key provisions of PPF are:
- PPF is a fixed income security scheme.
- It takes 15 years to mature.
- Every year Ministry of Finance, Government of India revises or notifies the interest rate. For ex. For FY2016, interest rate was 7.8% per annum (compounded annually).
Some features worth considering:
- Since PPF is entirely managed by the government of India, investments in PPF are not only risk-free but also canty be attached by any court.
- PPF can be leveraged to avail loans.
- PPF falls under Exempt-Exempt-Exempt (EEE) category. So, whatever interest one earns and the maturity amount one gets are exempted from income tax.
Mutual Funds: Are a collection of stocks or bonds bought and managed by a fund manager on your behalf. The fund manager creates a portfolio of securities that is consistent with the objective of the fund. The equity mutual funds are primarily invested in equity-based instruments and debt mutual funds are invested in fixed income securities like government and corporate bonds, non-convertible debentures etc.
Types of Mutual Funds:
- Equity-based Mutual Funds – These are high risk high return mutual funds.
- Debt based Mutual Funds – Low returns (1-2% more than 1-year FD rate). But also, a low-risk investment.
- Balanced – Combination of Equity and debt (Normally 65% Equity and rest debt). So is low of risk as compared to 100% equity funds but certainly high risk compared to debt funds.
Hence, both PPF and Mutual Funds are totally different investment options. A PPF assures you of guaranteed returns, whereas mutual funds returns are subject to market risks and volatilities. Before committing to mutual fund investment or PPF investment, the investor should gauge his or her risk appetite, tenure and objective of investment and then decide.