PPF vs mutual funds: safety, returns, lock-in and tax
Written and reviewed by Omm · Last reviewed · General information, not investment advice
People often ask whether to choose PPF or mutual funds. The better question is what job each part of your money has to do. PPF and mutual funds are not close substitutes, so comparing them is less like picking between two similar products and more like deciding how much to put in each.
The two in one table
| PPF | Equity mutual fund | Debt mutual fund | |
|---|---|---|---|
| Return | Set by the government and reviewed every quarter | Depends on the market; not guaranteed | Depends on interest rates and credit; not guaranteed |
| Risk | Very low; backed by the government | High in the short term; can lose value | Low to moderate; can lose value |
| Lock-in | 15 years, with limited early access | None (3 years for ELSS) | None for most |
| Limit | ₹1,50,000 a year | None | None |
| Tax on gains | Tax-free | Taxed on redemption | Taxed as per current rules |
| Deduction on the amount put in | Yes, under the old regime | Only for ELSS, under the old regime | No |
What each is good for
PPF is for the part of your money that must be safe and that you will not need soon. It gives a rate you can plan around, even though it is reviewed each quarter, and tax-free growth. See PPF explained.
Equity mutual funds are for money you will not need for many years and that you can leave alone through falls. They can grow faster than a fixed rate but they can also fall by a third or more in a bad stretch, and nobody can promise what the next ten years will give. Browse what real funds have delivered in the screener, and see SIP vs lumpsum for ways to invest.
Debt mutual funds sit between: usually more steady than equity but with no government guarantee. See debt mutual funds explained.
Comparing the numbers fairly
If you want to compare, use the same assumptions on both sides. A PPF projection at the current rate is a reasonable estimate only as long as the rate does not change much, which it can. An equity projection at an assumed return is not a forecast at all; it shows what would happen if returns were exactly that every year, which they never are. Run both through the PPF calculator and the SIP calculator, try a cautious return for the fund and a lower PPF rate, and see how wide the gap really is.
Also compare after tax and after costs. PPF has no tax on the interest and no running cost. A mutual fund has an expense ratio and is taxed when you sell; see mutual fund taxation.
Thinking about the split
One way to think about it, not advice for your situation:
- Money you need within a few years: keep it safe and easy to reach, not in equity.
- Money for long-term goals you will not touch: this is where equity can play a part, because time lets the ups and downs even out somewhat.
- The safe part of long-term money: PPF is a natural home, up to its yearly limit.
The mix depends on your goals, how long you can wait and how you would feel if a fund fell sharply. A SEBI-registered adviser can look at your whole situation; this site cannot.
This guide is general information, not investment advice. Mutual fund investments are subject to market risks. Scheme rules and rates are set by the Government and can change.