INSUBCONTINENT EXCLUSIVE:
Public provident funds (PPFs) offer fixed interest rate; mutual funds (MFs) are subject to market risks.Both mutual funds (MFs) and public
provident funds (PPF) are popular investment and savings schemes respectively
Investors rely on mutual funds when they want to create wealth while PPFs are handy when a customer wants to save money and then build on
PPF scheme is backed by the government and guarantees an assured interest rate and returns
Mutual fund, however, are subject to market risks
If you want to invest in either of the two, you should know about their features, advantages and disadvantages and then make a prudent
decision.Advantages of mutual funds1) The biggest advantage in mutual fund investing is the liquidity available in open-ended schemes
In case of most debt schemes, the pay-out cycle is t+1 i.e
you put in redemption today and you get your funds the next day
The redemption of mutual funds is thus fairly easy
In most cases it can be done online.2) "There is no amount restriction on any individual and there are offerings suited in line with one's
investment tenure and/or one's risk appetite," said Lakshmi Iyer, CIO (Debt) Head -Products, Kotak Mutual Fund.3) Taxation in mutual funds
varies depending on whether one is investing in equity- or debt-based schemes
Debt funds offer the benefit of indexation, which means that you can bring down your taxable gains on the investments by inflating the
This is good from investors' perspective
Since mutual funds are diversified, it reduces their overall risk.5) Besides, mutual funds are managed by professional fund managers who
These experts track stocks, sectors, industries etc., which helps them make wise investment decisions for their clients.6) Mutual funds can
be invested into via the SIP route also
Systemic Investment Plans or SIPs allows investors to invest in mutual funds through small and periodic instalments
Investors can enjoy the power of compounding when they invest in mutual funds via SIP
"When you extend the investment period, you can earn profit not only on your original investments, but also on any interest, dividends, and
capital gains that accumulate, so your money can grow faster and faster as the years roll on," said Amit Kachroo, Managing Partner, Aaneev
Wealth Builders.Advantages of public provident funds1) Public provident funds offer a fixed interest rate
The interest rates on PPF are decided every quarter by the government
For the quarter ending June, PPF investments will fetch an interest rate of 7.6 per cent per annum
Investment in PPF is safe and the yield is fixed
There is no risk involved.Since PPF accounts have a long tenure of 15 years, the impact of compounding is huge, especially in the later
years.2) PPF accounts enjoy a an exempt, exempt, exempt (EEE) status, which means that the returns are exempt from tax, the maturity amount
is tax-free and the main investment qualifies for a deduction under section 80C of the Income Tax Act
The contributions made to PPF accounts can be claimed for tax rebate up to Rs.1,50,000.3) If a PPF customer wants to avail a loan, he can do
so from third financial year onwards
This facility is available till the fifth financial year and the loan can be taken once a year
Moreover, the PPF account can be extended for another five years after the main 15 years are completed.Disadvantages of mutual funds1)
Returns on mutual funds are not guaranteed but linked to market sentiments
You can take cues from the past returns of mutual fund, but that clearly is no indication of its future performance
There are periods when mutual funds underperform the broader markets, which can be frustrating for investors
The true returns of a mutual fund scheme can only be realized in the long term
Hence you have to be extremely patient with your mutual fund portfolios.2) A liquid fund - which invests in treasury bills and corporate
papers and offers low interest rates among debt funds - could also be subject to volatility in markets, though it would be lower given the
underlying investments are of a shorter tenure
Therefore, the key to note while investing in any mutual fund scheme is to ascertain one's investment tenure, said Ms Iyer.3) Since mutual
funds are professionally-managed funds, there are some charges which mutual fund companies have to pay to the management and fund managers
Most mutual funds charge entry or load or both to meet the professional management expenses
These expenses directly affect the returns that an individual is able to realize from his/her investment portfolio
In some cases, if an investor pulls out money before one year, he/she has to pay an exit load of 1 per cent depending upon the fund.4) Some
mutual funds like equity-linked saving schemes (ELSS) - which help save income tax - or close-ended funds have a lock-in period of three
The money, thus, cannot be redeemed before that time period.5) Returns from mutual funds are charged under short-term capital gains (STCG)
tax currently at 15 per cent plus cess if the holding period is less than a year and are charged under long-term capital gains (LTCG) tax on
returns above Rs.1,00,000 at 10 per cent plus cess if the holdings are for more than one year
The dividend income from mutual funds comes under the dividend distribution tax and automatically gets deducted.6) As an investor, you can
only opt to invest in a particular mutual fund - you cannot select your investment in a particular stock
Therefore, you are forced to subscribe to the investment thesis of the fund manager.Disadvantages of public provident funds1) PPF requires
you to make an investment for 15 years
Withdrawals from PPF accounts can be done after the seventh financial year but only 50 per cent of the accumulated amount can be withdrawn
by the fifth year.2) You cannot close your PPF account prematurely
Only in case of death of the account holder can the PPF account be closed.3) As per the rules, a minimum contribution of Rs 500 per year and
maximum of Rs 1.5 lakh per annum is allowed
The limit of Rs 1.5 lakh is applicable on all accounts either held in investor's own name or on behalf of a minor.4) Only a resident
individual can open a PPF account and no joint ownership is allowed
One cannot open more than one account in his/her own name
However, an account opened on behalf of a minor is treated as separate
Non-resident individuals (NRI), Hindu Undivided Families (HUF) or body of individuals (BoI) cannot invest in PPF.Features of mutual funds,
Investors can invest as low as Rs 500 and maximum Rs 1.5 in a financial year.Investors can invest small amount as low as Rs.500
There is no maximum limit.Investment choiceThere are no investment options in PPF
An investor has to invest fixed amount on monthly/yearly basis for a fixed return.Investors have options to invest in different type of
Debt funds, large cap equity funds etc
based on their risk appetites.TenorIn PPF investors have to invest for minimum 15 years.There is no tenor for MF; investors can do it for
However, investors have to invest for minimum 6 month is they are investing in mutual funds via SIP.ReturnReturns on PPF are fixed and are
The current interest rate is 7.6% compounded annually.Returns on MF are not fixed as they are market-linked
In last 10 years, equity mutual fund has generated a return of 12%-15% p.a
and debt mutual fund has given a return of 8%-9% p.a
The historical returns are not guaranteed in future.LiquidityPPF is highly illiquid in nature
The money can be withdrawn anytime however investors may have to bear exit load, if applicable.TaxationPPF has Exempt-Exempt-Exempt (EEE)
Investments in PPF are tax deductible under section 80C of Income Tax
Accumulated amount and interest earned is also non-taxable at the time of withdrawal.ELSS: Investments in upto Rs 1.5 lakh are tax
deductible under section 80C of Income Tax
Capital gains are taxable as per equity funds
zdhbvjdvbEquity Funds: 15% tax on capital gains if the holding period is less than 1 year and 10% tax on capital gains above Rs 1 lakh if
the holding period is more than 1 year.Debt Funds: Capital gains get added to the income of the investor if the holding period is less than
20% tax on capital gains after indexation if the holding period is more than 3 years.RiskPPF is a safe investment product and there is no
risk of capital loss.MF investments are risky as returns depend on market performance
However, the risk varies among various types of mutual funds
Debt mutual fund investments are less risky compared to equity mutual funds
Thus, investors can lose their invested capital.(As told by Abhimanyu Sofat, Head of Research, IIFL Securities)So what is better: mutual
funds or public provident funds"Mutual funds definitely make a better investment choice over any asset class to fulfil one's financial
It allows investors to diversify their portfolio depending upon their investment profile and objective
It gives a return which is inflation-adjusted over a long-term investment Moreover, investing in mutual funds provides transparency," said
Suren Kochhar, Chief Business Officer, Indiabulls Asset Management Ltd.PPF is for the faint-hearted!Investors with absolutely low or no risk
appetite should consider investing in PPF, said Mr Kachroo
"The returns from PPF have come down over the past couple of years and inflation is around 6 per cent, so the actual returns would be around
2 per cent-2.5 per cent," he added."The most obvious reason an investor should invest in PPF is the tax benefit it offers
PPFs are ideal investment vehicles for investors who are risk averse and do not mind settling for a lower investment return
Mutual funds can often be volatile and risky but in the longer term they have consistently delivered superior returns in comparison to fixed
income securities," said Rahul Agarwal, Director Wealth Discovery/EZ Wealth.Invest according to what you can bearInvestors should invest as
per their risk profile to generate better returns, said Abhimanyu Sofat, Head of Research, IIFL Securities.So, as experts suggest, if you
want higher returns but do not mind taking a bit of risk, go for mutual funds
But if you want assured returns, you should consider investing in public provident funds.
