SIP vs PPF: Know which investment suits you the most!

Tanushree Jaiswal Tanushree Jaiswal 22nd May 2023 - 10:02 am

When it comes to managing one’s finances, investors often have plethora of investment options to choose from. A lot of decisions are based on one’s financial goals and investment objectives. The investments can range from fixed income securities to aggressively managed portfolios. So here, we bring to you two of the most popular investment vehicles amongst the Indian investors.

Public Provident Fund (PPF) vs Systematic Investment Plan (SIP):

When you are considering making an investment, you must have come across these two popular investment options. While both PPF and SIP offer tax benefits, defined risk profiles, and expected lock-in period, there are some key differences which sets them apart. Importantly, knowing their key similarities and differences shall help you make informed decisions and let you decide which option is most suitable for you.

What is SIP?

Systematic Investment Plan (SIP) is typically used to invest a fixed amount of money at regular intervals in a mutual fund. It is a popular investment method, particularly in the context of mutual funds. Mutual Fund units are issued to you against your investment. The units depend on Net Asset Value (NAV), i.e., the prevailing price of the fund. To talk in simpler terms, when the NAV is low, you shall receive more units and vice versa. However, it is important to note that higher NAVs do not necessarily mean outstanding performance of the Mutual Fund. When you participate in a SIP, you authorize your bank or mutual fund provider to deduct a fixed amount from your bank account periodically and invest it in the chosen mutual fund scheme.

What is PPF?

Public Provident Fund (PPF) is a long-term savings scheme offered by the Indian government, with the purpose to save for retirement and provides attractive investment options for the investors. Naturally, it offers maximum security and safety, along with tax benefits. The scheme has a 15-year maturity period, with the option to extend it in blocks of 5 years. The minimum investment is Rs 500 per year, while the maximum is Rs 1.5 lakh. Partial withdrawals are permitted after the 7th year, and loans can be availed against the PPF balance. As described earlier, PPF provides a safe and secure investment option with a fixed interest rate set by the government.

Difference between PPF vs SIP:

Here are the key differences between PPF and SIP that would provide a better clarity!

	PPF	SIP
Investment Purpose	Long-term savings for retirement. It also offers tax benefits.	Suitable for long term investments and wealth accumulation. It gives investor a chance to earn potential higher returns.
Product Structure	Government-backed savings scheme that offers long term guaranteed returns	Investment scheme that is market-linked to produce good long-term returns.
Investment Period / Lock-in Period	15 years (extendable in blocks of 5 years)	No such fixed investment period. It can be redeemed at any point in time and there is no lock-in period. In case of ELSS, lock-in period is 3 years.
Tax Benefits	The PPF investments are exempted from Tax. Tax deductions are possible under Section 80C.	Except for ELSS, SIP investments are taxable as per the tax slab of the investor and holding perid.
Expected returns	Fixed interest rate (7.10%) is set by the government, and investors will get the whole amount upon maturity.	Returns usually vary by a greater extent, depending upon the type of Mutual Fund and risk profile of the investment. The returns are primarily linked with the market.
Investment Amount	Minimum Rs 500 per year; Maximum Rs 1.50 lakh per year	Minimum amount can be as low as Rs 500 per month and has no maximum limit. This regular investment amount can be changed at point in time.
Investment Risk	PPF has relative very low risk since it is backed by the government of India. The money is safe and secured with guaranteed returns.	The risk of the SIP can be medium to high depending upon the type of mutual fund. It is highly linked towards the market risk and thus, investors should carefully analyse the risk profile of the underlying mutual fund.
Liquidity	Less liquidity as partial withdrawals are only possible after the 7th year.	SIP can be liquidated at any point in time. The Mutual Fund units can be redeemed at NAV from the Mutual Fund house.
Investment Assets	The investment is made in Government-backed securities and infrastructure.	The investment is made across Mutual funds, stocks, bonds, etc depending upon the investment objectives.

PPF Returns and SIP returns:

The PPF returns are subjected to review every quarter by the Government of India. These returns and fixed and guaranteed by the government. Historically, the PPF returns lied between 7-8% per annum. Here is the brief history of the PPF rates:

Since April 2020, the PPF rates have remained constant at 7.10% per year.
From July 2019 to March 2020, the PPF rate stood at 7.90% per year.
For a short period from January 2019 to June 2019, the PPF rate stood at 8% per year.

In case of SIP, the returns are market linked. It varies as per the market conditions as well as the performance of the fund manager. Mutual fund returns, on an average, lie at around 12-15% per year but can vary greatly.

Tax Benefit Comparison in SIP vs PPF

Tax Comparison	PPF	SIP
Tax Deduction	Eligible for tax deductions under Section 80C	No Tax deduction except for ELSS.
Maximum Deduction	Up to Rs 1.50 lakh per year (as per Section 80C limit)	ELSS funds can save up to Rs 1.50 lakh per year (as per Section 80C limit)
Tax on Returns	Tax-free interest earnings and tax-free maturity proceeds	Capital gains tax may apply on the profits earned from the sale of units or securities held for less than one year
Lock-in Period	15-year lock-in period for availing tax benefits	No specific lock-in period for tax benefits. Tax benefits are available based on the holding period of underlying investments.
Withdrawal Taxation	Partial withdrawals and maturity proceeds are tax-free	Tax implications depend on the holding period and the type of investment. Short-term capital gains (held for less than one year) are taxed as per the applicable slab rate, while long-term capital gains (held for more than one year) may be subject to taxation at a specific rate

Who should invest in SIP?

SIP helps you achieved additional returns and thus, prepare you for long term wealth. It is quite helpful for those expecting to achieve medium to long term goals or for any specific objective like marriage, children’s education, etc. It can be an excellent option for those who want to seek professional management and have limited funds. However, it is important to know Mutual Fund’s risk profile before investing.

Things to know before investing in SIP:

Key terms like Expense Ratio and Exit load are to be understood by the investor before investing. Any increment in regular investment after a specific period should be reviewed to understand the investment. Investors should clearly define their investment horizon, Risk profile and Investment objective before investing.

Who should invest in PPF?

PPF is suitable for investors seeking retirement corpus and tax benefits. Investors should have a long-term horizon as the funds shall be locked in for 15 years. The PPFs are “Risk-averse” and can be a great fixed income asset.

Things to know before investing in PPF:

Key terms that define investing in PPF are investment limit, lock-in period, interest rate, tax benefit and withdrawals. It is crucial to read the PPF scheme document and consult a financial advisor if needed. Check if your investment goals and objectives are aligned and fulfilled by investing in PPF scheme,

CONCLUSION

Overall, SIP and PPF are popular investment options in India, but they have different features and benefits. SIP is suitable for investors who are willing to take risks for potentially higher returns and to achieve long term goals, while PPF is suitable for investors who are risk-averse and looking for tax benefits with guaranteed returns, along with creating corpus for retirement. Investors should carefully analyse their investment objectives, risk tolerance, and investment horizon before choosing between SIP and PPF.

FAQs

How to invest in PPF & SIP both?

You can invest in both, PPF and SIP. In case of PPF, you need to open a PPF account either with a post office or a bank that offers a PPF scheme. Subsequently, while investing in a mutual fund, open a mutual fund account with a broker or Mutual fund house. It's essential to monitor and manage your investments to ensure that they are aligned with your investment goals and risk profile.

Which is the best option for investment from SIP Vs PPF?

Best option solely depends on the investor’s risk and investment objective. A risk averse and retirement-oriented investors shall seek investments in PPF while an investor seeking higher potential market returns and long-term wealth shall opt for SIP. Whatever the case is, it is best to analyse your investment objectives to find suitable investment.

Which one is the safe options for investment from SIP Vs PPF?

PPF is safer as it is assured and guaranteed by the government of India. It can be an excellent option for investors seeking retirement corpus. However, investors should also consider the lock-in period and return expectations.

What is the minimum amount I can invest in SIP Vs PPF?

In PPF, you can invest a minimum of Rs 500 per year while SIP have varied minimum investment plans. Some can get to as low as Rs 500 per month to as high as Rs 5000 per month.

How do you rate this article?

Characters remaining (1500)

View All

Disclaimer: Investment/Trading in securities Market is subject to market risk, past performance is not a guarantee of future performance. The risk of loss in trading and investment in Securities markets including Equites and Derivatives can be substantial.

FREE Trading & Demat Account