PPF vs SIP: Where will you create a bigger fund if you invest ₹5,000 every month? Know the complete profit-loss and tax mathematics of 15 years

Public Provident Fund (PPF) and mutual fund Systematic Investment Plan (SIP) are the two most preferred investment options for long-term financial goals, such as children’s higher education or creating a retirement fund. Both the mediums provide the facility of depositing small savings regularly, but both are quite different from each other in terms of returns, risk and capital growth. If you want to invest your savings of ₹5,000 every month for 15 years, it is important to understand where your money will get the most return and whose risk profile suits you.

By depositing ₹5,000 every month for a period of 15 years, your total invested capital will be ₹9,00,000 (Rs 9 lakh). The estimated funds generated in both the mediums during this period are as follows:

If the performance of equity mutual funds remains strong and the average returns sit at 14% per annum, the same SIP corpus can grow to around ₹30.6 lakh in 15 years.

Public Provident Fund is a small savings scheme supported by the Government of India. There is 100% government guarantee on both the capital deposited and the interest received, due to which there is no risk of market fluctuations. The biggest feature of PPF is its ‘EEE’ (Exempt-Exempt-Exempt) tax status. This means that deposits under Section 80C get tax exemption up to ₹1.5 lakh, the interest earned every year is completely tax-free, and there is no income tax on the entire amount received at the time of maturity. The lock-in period of PPF is 15 years, which can be extended in blocks of 5 years.

Systematic Investment Plan (SIP) is a means of investing a fixed amount every month in an equity or hybrid mutual fund. This money is invested in shares of companies listed in the stock market. Diversified equity mutual funds have historically delivered compound returns (CAGR) of 12% to 15% over the long term (10 to 15 years). This return is capable of creating a larger corpus by beating inflation. However, SIP has no fixed guarantee of returns and is subject to short-term fluctuations. On the tax front, long term capital gains (LTCG) up to ₹1.25 lakh on holdings in equity funds for more than 1 year remain tax-free, while gains above that are taxed at the rate of 12.5%.

There is a clear difference between the two options on the scale of security and liquidity. PPF offers complete capital protection but has a strict lock-in of 15 years (although partial withdrawals and limited loan facilities are available after the 7th year). On the other hand, open-ended mutual fund SIPs offer complete liquidity; The investor can withdraw money by selling his units whenever he wants, can increase or decrease the SIP amount, or can pause it at any time.

If your primary objective is to have guaranteed capital protection without any risk and to earn completely tax-free returns, then PPF is a solid option. On the other hand, if you have a long-term perspective, have the ability to withstand normal market fluctuations and want to create a big fund for retirement or children’s future, then mutual fund SIP can provide you with much more wealth. Many financial advisors recommend a balanced strategy, under which you can take advantage of both safety and growth by investing ₹2,000 or ₹3,000 of the ₹5,000 in an equity SIP and the remaining amount in PPF.