Nowadays, people are much aware of their future goals, and plans. To accomplish this, they seek the best investment options which can help them to generate outstanding stock trading returns.
While selecting the investment instruments, investors are mostly looking for options that provide them low risk, tax benefits and liquidity.
Many people often start their investments either with SIP or PPF. However, some experienced investors park their money into equity (i.e. stocks).
PPF and Mutual Funds are the two main investment options that suit ordinary people of India. Let’s understand the investment instruments in detail and try to understand which one provides high liquidity and interest rates.
SIP or Systematic Investment Plan
A systematic Investment Plan or SIP is considered one of the best ways of investing in mutual funds. Newbies or students prefer to choose SIP over other investments because it teaches the financial discipline with wealth building for the future.
In SIP, you are allowed to invest a fixed amount for the investment in the market at regular intervals.
SIP needs a regular investment that helps you average out the purchase price and guards you from inadvertently catching a market peak when you invest.
How do SIPs Work?
SIP work on the two principles:
Rupee Cost Averaging
As investors, we don’t know which is the right time to enter the market? Even top-notch investors often experience the same difficulty in finding the right moment when to enter and exit the market.
This mostly happens, when we start to rely on our emotions, getting sentimental by the market movements and end up buying when the market is going higher and selling when they are lower.
This is what we should not be doing.
Rupee cost averaging helps us to reduce the guesswork. In Rupee Cost Averaging, you need to invest a fixed amount of money no matter, the market goes up or down. This makes you buy more units when the market faces a downward trend and lesser units when it is at the peak.
This approach brings down your average cost per unit in the long run.
Compounding
The amount you save for the long term may provide an exponential impact on your investment. This all happens because of the effect of the compounding.
Let’s understand it with a suitable example:
Person A starts investing for his retirement at the age of 40. Considering interest rates of 7% with a monthly investment of Rs 1000, his total investment at the end of 20 years will be Rs 5,28,000.
Person B, on the other hand, starts investing for his retirement at the age of 20. Considering interest rates of 7% with a monthly investment of Rs 1000, his total investment at the end of 40 years would be Rs 26,56,436 – almost 5 times higher than person A.
Advantages of Investing in SIP
Financial Discipline
Needless to say, the regular investment amount brings financial discipline to the inventors. In other words, it encourages discipline and helps you earn wealth without disturbing your lifestyle.
Lower Risks
Even if mutual funds are subject to market risks, they are still better than equity. This is because SIP diversifies your investment amount thus minimize the risk to capital that will help you achieve volatility.
Convenience
SIPs give you the flexibility to increase or decrease the amount of investment at any time which in turn makes it the most hassle-free mode of investment.
Public Provident Fund or PPF
Public Provident Fund or PPF is a government-backed scheme where you will get fixed returns but set by the government every quarter. Many people consider PPF is a retirement saving scheme offered by GOI with the motive of providing a secure life post-retirement.
In PPF, the minimum deposit one can make is Rs 500 per financial year whereas the maximum deposit amount is Rs 1.5 Lakh.
As said earlier, the PPF interest rate for Q2 (July-September) has been fixed at 7.1%.
Difference Between SIP and PPF
| Parameters | PPF | SIP |
| Investment Amount | Min-Rs 500, Maximum Rs 1.5 Lakh | Minimum Rs 500, No Max. Limit |
| Investment Tenure | 15 Years minimum, Extendable in blocks of 5 years | Can be low as 6 months and high as 20 years. |
| Lock-in-period | 15 Years | No-lock-in-period |
| Investment Risk | Since it’s a govt.backed scheme. Hence totally safe | It is risky as SIP is linked with market-linked |
| Tax-Benefits | EEE (Exempt-Exempt-Exempt) category of tax | Depends on the type of mutual fund. For instance, ELSS is eligible for tax deduction under Section 80C |
| Liquidity | Low | High |
| Returns | 7.1% (Q1of FY 2021-22) | **Market Linked |
SIP Vs PPF: A Comparison
1. Safety
PPF is a government-backed saving investment instrument where the money deposited in PPF is utilized by the government. Also, the interest on the same is also paid by the government. Therefore, it is considered the safest instrument to invest in.
On the other hand, money in the mutual fund is subject to market risk. The value of equity funds also fluctuates every day. Debt funds also grow up and down due to changes in the bond prices.
However, a mutual fund offers higher growth in the long run. Also, investment in mutual funds through SIP will minimize the market risk and volatility by diversifying your money into different sections.
2. Returns
The returns of a PPF account are fixed and guaranteed by the government. However, the interest rate is declared by the government every quarter.
Here is the interest rate of PPF
| Period | Interest Rates |
| January to March 2021 | 7.1% |
| October to December 2020 | 7.1% |
| July to September 2020 | 7.1% |
| April to June 2020 | 7.1% |
| January to March 2020 | 7.90% |
| October to December 2019 | 7.90% |
| April to June 2019 | 8.0% |
Returns of the mutual fund, on the other hand, are market-linked. The returns of mutual funds vary as per the market conditions and the performance of the fund manager. The returns of a few of India’s largest funds are mentioned below:
| Fund | SIP Return |
| Aditya Birla Sun Life Frontline Equity | 9.60% |
| Kotak Standard Multicap Fund | 13.29% |
| ICICI Balanced Advantage Fund | 10.22% |
| SBI Small Cap Fund | 15.83% |
3. Liquidity
Mutual funds are much more liquid than PPF. This is because PPFs have a lock-in period of 15 years. In a mutual fund, you can redeem your investments on any business day. This is the reason mutual funds are more liquid than PPF.
4. Tax-Benefits
Investment in PPF accounts for a tax deduction up to 1.5 Lakh per annum under section 80C of the income tax act, 1961. The interest that arrives on the PPF is exempt from the tax but must be declared in the annual income tax return.
The PPF maturity amount is also exempt from tax. Hence, PPF provides exempt-exempt-exempt-tax treatment.
Mutual fund returns are taxed according to the type of mutual fund scheme and investment time period.
Investment in a specific category of mutual funds is called ELSS funds tax also gives you a tax deduction of up to 1.5 Lakh per annum under section 80C. This exemption does not apply to other mutual fund categories.
Which Investment Option Should You Select?
It is difficult to compare one investment instrument with the other i.e. market-linked. PPF is apt for those who want zero risks in their investments. While mutual funds are for those investors, who are willing to take the moderate risk so that they can earn higher returns. The risk can further be reduced by investing through a long-term SIP in mutual funds.
