Most of the people who want to do tax saving in 80C are confused if they should invest in PPF or ELSS (tax saving mutual funds). Both PPF and ELSS offer taxation benefits of upto Rs 1.5 lacs under sec 80C.
ELSS vs PPF – Meaning
Lets start with their meaning and what exactly they are.
PPF means public providend fund. Its a government scheme which is run by post office and its a very safe financial product. There is no risk to it because its guranteed by government of India. Its quite famous among investors for its safety and assured returns.
On the other hand ELSS (Equity linked saving scheme) that is linked with Equity. Its mainly invests into a bunch of stocks that gives you income tax benefit. Equity mutual funds mainly invest in stocks of companies, which makes sure that they deliver high returns, but at the same time they are risky (actually volatile) and their returns keep going up and down.
Since the investment is in Equity, it is considered as volatile and returns do vary every day. The returns are calculated based on NAV on any particular day. Now, lets compare PPF and ELSS on various parameters.
#1 – Returns
The returns in PPF change every year and its around 7.5-8% . Right now its 7.8% and it keeps on changing from time to time whichis notified by government. Earliar many years back, PPF returns were in range of 12% and then it came down to 9%. But from last few years, its hovering around 8%.
Incase of ELSS, its linked to market and the returns are not fixed in short term. Some years it can be 20%, some times it can be 50% and in some years it can be -25% also . So you can see that the returns are totally dependent on stock markets and how well they perform. The returns are not at all guaranteed by anyone.
The returns can never be committed by an advisor since its purely linked to market sentiments. But on an average, over the long term ELSS delivers in the range of 14 to 22% Cagr.
The returns in PPF change every year and its around 7.5-8% . Right now its 7.8% and it keeps on changing from time to time whichis notified by government. Earliar many years back, PPF returns were in range of 12% and then it came down to 9%. But from last few years, its hovering around 8%.
Incase of ELSS, its linked to market and the returns are not fixed in short term. Some years it can be 20%, some times it can be 50% and in some years it can be -25% also . So you can see that the returns are totally dependent on stock markets and how well they perform. The returns are not at all guaranteed by anyone.
The returns can never be committed by an advisor since its purely linked to market sentiments. But on an average, over the long term ELSS delivers in the range of 14 to 22% Cagr.
#2 – Lock in Period
Your PPF investments are locked in for 15 yrs, but some partial money can be withdrawn after 7 yrs. So basically its a very long term product, and if you are investing in PPF, you should be ready to lock you money for a very long time. After 15 yrs, you can again extend your PPF for another 5 yrs (any number of time) and you money will again be locked for that 5 yrs.
On the other hand, ELSS have a lock in for just 3 yrs. You can take out your money after 3 yrs. Important point to note here is that each investment is locked in for 3 yrs, so if you have an SIP running in ELSS fund, then each installment is locked for 36 months.
So if you want money in 4-5 yrs, ELSS is a better choice compared to PPF from liquidity point of view.
Your PPF investments are locked in for 15 yrs, but some partial money can be withdrawn after 7 yrs. So basically its a very long term product, and if you are investing in PPF, you should be ready to lock you money for a very long time. After 15 yrs, you can again extend your PPF for another 5 yrs (any number of time) and you money will again be locked for that 5 yrs.
On the other hand, ELSS have a lock in for just 3 yrs. You can take out your money after 3 yrs. Important point to note here is that each investment is locked in for 3 yrs, so if you have an SIP running in ELSS fund, then each installment is locked for 36 months.
So if you want money in 4-5 yrs, ELSS is a better choice compared to PPF from liquidity point of view.
#3 – RISK
PPF is not at all risky because its value does not go down. PPF is also guranteed by government, so there are no changes of fraud. If you plot the graph of your PPF value, you will see a straight line going up. However note that PPF has a totally different kind of risk, which is that does not give inflation adjusted positive returns. Means that its returns match the inflation and at the end, you do not have any net returns.
On the other hand ELSS are volatile, which is often reffered to as "RISK". The value of ELSSS keeps going up and down depending the stock market movements. In the short term you might experience a down turn and loss in value, but over a longer term, you will see good results.
As most of the investors are risk averse and do not like to see a dip in value of their investments, most of the investors stay away from ELSS or stocks in general, and loose the chance to experience great returns at the same time.
PPF is not at all risky because its value does not go down. PPF is also guranteed by government, so there are no changes of fraud. If you plot the graph of your PPF value, you will see a straight line going up. However note that PPF has a totally different kind of risk, which is that does not give inflation adjusted positive returns. Means that its returns match the inflation and at the end, you do not have any net returns.
On the other hand ELSS are volatile, which is often reffered to as "RISK". The value of ELSSS keeps going up and down depending the stock market movements. In the short term you might experience a down turn and loss in value, but over a longer term, you will see good results.
As most of the investors are risk averse and do not like to see a dip in value of their investments, most of the investors stay away from ELSS or stocks in general, and loose the chance to experience great returns at the same time.
#4 – Taxation
PPF is tax free. There is no tax on PPF returns. Whatever returns you get in PPF are 100% tax exempt.
Earliar ELSS was also tax exempt after 1 yr, but with budget 2017-2018, now any gains in equity mutual funds or stocks are taxable @10% when you sell them, but you get an exemption of Rs 1 lac per yr. Which means that if your profit after selling ELSS is 4 lacs, then you have to pay 10% tax on 3 lacs. However even after this taxation, the post tax returns of ELSS are much better than any other investment option.
PPF is tax free. There is no tax on PPF returns. Whatever returns you get in PPF are 100% tax exempt.
Earliar ELSS was also tax exempt after 1 yr, but with budget 2017-2018, now any gains in equity mutual funds or stocks are taxable @10% when you sell them, but you get an exemption of Rs 1 lac per yr. Which means that if your profit after selling ELSS is 4 lacs, then you have to pay 10% tax on 3 lacs. However even after this taxation, the post tax returns of ELSS are much better than any other investment option.
To invest into Mutual Funds, you may contact Kumar Bhatia at +91 9769321013. Kumar is a SEBI registered financial advisors in Mutual Funds.
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