Investing in PPF vs. Investing in ELSS Mutual Funds
Equity Linked Savings Scheme (ELSS) and Public Provident Funds (PPF) are two popular fixed-income investment options in India. The two have differing advantages and serve different types of investors. This blog will look at some of the hidden aspects of putting your funds into PPF or ELSS Mutual Funds so that you can make an informed decision. It will also help you buy mutual funds online with a detailed comparison.
Understanding Public Provident Fund (PPF)
PPF is a savings scheme for residents in India, sponsored by the government to promote long-term savings. It has attractive interest rates and tax exemptions under section 80C of the Income Tax Act.
Individuals can open PPF accounts with designated banks or post offices and make at least ₹500 contributions annually up to a maximum limit of ₹1.5 lakh. The minimum duration for this investment is 15 years, with options for extension in multiples of 5 years thereafter.
Understanding Equity Linked Savings Scheme (ELSS)
Unlike the earlier one, these are types of mutual fund schemes that mainly invest in equity and equity-related instruments. They are also known as Tax Saving Mutual Funds under section 80C of the Income Tax Act 1961, which gives them an edge on other investment avenues by providing tax exemption.
ELSS funds are not only the shortest but also have the lowest lock-in period among all other tax-saving options under Section 80C.
Investors with a high-risk tolerance level and long-term investment horizon will find ELSS funds suitable for them. This means that they can give better returns compared to traditional fixed-income tools like PPF because they put money in shares’ markets.
Comparison between PPF and ELSS Mutual Funds
When deciding between PPF or ELSS Mutual Funds, certain factors need to be considered:
1. Risk Appetite
Public Provident Fund offers assured/confirmed returns without any chance of eroding the principal amount invested. However, ELSS are subject to market volatility due to being investments in equities.
2. Tax Benefits
Under Section 80C, both PPF and ELSS Mutual Funds offer tax benefits. However, when compared to PPF’s lock-in period of 15 years, ELSS funds have a lock-in period of 3 years only. In addition, they offer a possibility for higher returns over the long term, thus making them more tax efficient in certain cases.
3. Investment Horizon
For instance, while PPF has a tenure of 15 years, its counterpart ELSS funds have just 3 years’ worth of lock-in time. Investors should consider their investment horizons based on their financial goals and risk tolerance.
This is best suited for those with long-term savings needs, such as retirement planning, while the latter is good for wealth creation over the medium to long term.
Final Words
Both PPF and ELSS Mutual Funds have their merits and cater to different investor needs. Understanding your financial goals, risk tolerance, and investment horizon is essential in choosing between these two investment avenues. So, if you are looking forward to investing in the best ELSS mutual funds, open your account on Dhan.
