When it comes to long-term financial planning, there are two savings plan which fulfil your financial needs, namely the Public Provident Fund (PPF) & Systematic Investment Plan (SIP). PPF provides long-term security, maintaining the stability of returns, whereas SIPs provide a disciplined & strategic investment plan. To know more, let us go through this article.
What is PPF?
A Public Provident Fund is government backed savings scheme, offering attractive interest rates along with returns. The amount to be deposited in the fund ranges from INR 500 to INR 1,50,000 per financial year, either in equal monthly instalments (EMIs) or lump sum. The amount deposited, maturity amount & interest amount are totally exempt from taxes. It offers secure & stable returns as they are not market-linked. It includes a fixed tenure of 15 years to invest funds, make disciplined savings, & offer an option to withdraw the funds once the 5-year period has been completed.
What is SIP?
A Systematic Investment Plan (SIP) is a financial tool that allows an investor to invest a fixed amount regularly in mutual funds on a specified date. These plans are flexible, which helps build wealth over a period of time by reducing risks & dealing with market fluctuations with the power of compounding. It is a simple & hassle-free way to build wealth & stay disciplined with investments. When the prices of funds reduce, more units can be purchased, & when the prices of funds increase, fewer units are bought, making it a balanced investment.
Difference between PPF & SIP
Provided are the differences between PPF & SIP:
| Basis of Difference | PPF | SIP |
| Meaning | It is a fixed-income savings scheme backed by the Government of India, where individuals can invest a fixed amount yearly to get guaranteed returns. | Under this plan, investments are made in mutual funds at regular intervals of time by transferring a fixed amount. |
| Risk Factor | It carries low risk due to being backed by the Government of India, hence it offers guaranteed returns. | These plans are subject to market risks; hence, they do not offer guaranteed returns, as they are linked to the market. |
| Returns | The quarterly rate of interest ranges between 7% & 8%. | Not fixed, but they are higher. |
| Investment Tenure | Minimum of 15 years with an option to extend in a 5-year block | Flexible tenure, i.e. can be chosen depending upon the financial objectives. |
| Liquidity | Limited Liquidity, i.e. partial withdrawals are allowed once the period of 5 years has been completed. | More liquid, i.e. once the lock-in period is completed, funds can be withdrawn. |
| Taxation Benefits | Dedication of tax u/s 80c on the amount of premium paid, & the returns are exempt from tax u/s 10(10D). | Get a tax deduction of 80C on the premium amount paid, not more than INR 5 lakhs. |
| Minimum Investment Amount | Minimum: INR 500Maximum – INR 1,50,000 | As low as INR 500 |
| Best Suits | Risk-averse investors looking for guaranteed returns | Best suited for those who are willing to accept a high level of risk. |
| Interest Rate | Around 7.1% per annum | An average return of 10-15% per annum. |
| Lock-in-Period | Minimum of 15 years with an option to extend in a 5-year block | No lock-in period, but varying according to the plan, it can be 1 or 3 years. |
Benefits of PPF
Provided are the benefits of investing in the PPF Savings Plan:
- Stable Returns:
As the Indian government supports this plan, which is revised on a quarterly basis, it offers consistent returns.
- Long-Term Savings:
It is designed for a long-term, i.e. 15-year tenure, making them a disciplined savings, & helping in financial planning.
- Tax Benefits:
It is eligible for a tax deduction of up to INR 1.5 lakhs on the amount of premium paid u/s 80C.
- Tax-Free Maturity:
The interest earned & proceeds on maturity are totally exempt from tax.
- Low Risk:
Being backed by the government of India& not linked to the market offersless risk.
- Loan Facility:
This facility can be availed within the 3rd& 6thyears of investment.
Benefits of SIP
Provided are the benefits of investing in the SIP Saving Schemes:
- Diversification:
It includes investments in multiple asset classes, which include debt, equity, or hybrid funds.
- Potential for Growth:
If left for a longer period, this scheme offers higher returns, depending upon the market situations & choice of funds.
- Flexibility:
It provides flexibility while making contributions to the fund, i.e. it can be started, stopped, increased, or decreased at anytime without penalties.
- Rupee Cost Averaging:
While making regular investments, more units can be bought when prices are low &fewer units can be bought when prices are high, helping to average the cost of mutual funds.
- No Fixed Lock-In:
There is no fixed lock-in period, except for Equity Linked Saving Schemes (ELSS), which come with a lock-in period of 3 years.
- Customisation:
The frequency of investment & amount of contribution can be chosen depending upon the financial objectives.
Who Should Invest in PPF & SIP?
PPF best suits those individuals who are not willing to take risks, i.e. want guaranteed & stable returns during a longer term period. SIPs, on the other hand & provide investment options that are objective-oriented & flexible, & best suit those individuals who are willing to accept a moderate to high level of risk and prefer capital appreciation with market-related investments.
PPF or SIP: Which is better?
PPF & SIP both offer different features & benefits for different financial objectives. On one hand &, SIPs are linked to the market, still offering flexibility, depending on the withdrawal amount, investment frequency, & investment amount. PPF, on the other hand &, backed by the Indian government, offers a limited withdrawal facility, a fixed rate of interest, and a longer lock-in period; hence, it is considered to offer consistency in long-term savings.
PPF offers assured returns with low risk, which are basically long-term & tax-free. SIPs, on the other hand & offer high returns due to their link to the market & are highly liquid. Hence, to choose one between the two, the choice will wholly depend upon the risk tolerance level, financial objectives, investment tenure & investment horizon.