SIP vs. PPF: Comparison, returns, and which is better

PPF vs. SIP: When you are considering making an investment and are weighing the various options available to you, you are sure to come across instruments such as PPF (Public Provident Fund) and SIP (Systematic Investment Plan). While both PPF and SIP require recurring contributions and offer tax benefits, a host of factors differentiate the two. Knowing the similarities and differences between PPF and SIP will help you decide which one to pick.

Take a look at some questions that you must answer to understand which instrument you should choose.

Do you want flexibility?

Both PPF and SIP are long-term investment plans. However, they differ in terms of their maturity and lock-in period. While SIPs can be stopped and redeemed at any time, a PPF comes with a tenor of 15 years, with a 7-year lock-in period. After that, you can withdraw the amount partially.

Also, in the case of PPF, an extension of up to 5 years is allowed on maturity. But you cannot close a PPF account regardless of whether it is active or inactive. Here, one benefit that both offer is that you do not have to invest a lump sum amount. Both options allow you to invest periodically, at your convenience.

Do you prioritise safety and want secure returns?

PPF is a government-backed investment instrument so the security factor is high. Apart from assured returns, this instrument ensures that your money is in safe hands. On the other hand, investing in SIPs is investing in market-linked securities. So, the risk quotient is higher. However, since financial experts manage SIPs, you can breathe easily. Also, staying invested in the long run will negate the impact of any rough patch where the market dips.

Is earning a high rate of interest crucial?

When it comes to analysing both these options based on returns, you will find that PPF offers you a rate of interest of 7.6% per annum. However, SIPs offer you a higher return as the average interest rate ranges between 12% and 15%, and can go up to 21% under pleasant market conditions.

So, you can capitalise on your savings by investing in an SIP with trusted fund houses such as Bajaj Finance. Here you will benefit from a high rate of interest as well as experienced fund managers.

Do you want high liquidity from your investment?

You can partially withdraw funds from your PPF in case of emergencies. The amount for withdrawals is capped at less than 50% of the total balance at the end of the fourth preceding year, or the year preceding the year of withdrawal, depending on whichever of the two is lower. But, note that you can place a withdrawal request from the 7th year onwards, once each year. SIPs, on the other hand, are very liquid and you can redeem them at any point in time. All you need to do is pay a small exit charge if you are exiting before the holding period is up, and pay tax on your short-term capital gains if it is applicable.

How much money do you want to invest?

You can regulate your SIP and PPF contribution based on your monthly financial obligations and mandatory expenses. The minimum deposit is as low as Rs. 500 for both. For PPF, your maximum contribution can be Rs. 1.5 lakh per year. Also, making at least one deposit in a year is a must to keep your PPF account active. However, with SIPs, the cap on how much you can invest stands at Rs. 25,000 per day.

Once you have answers to these questions, you can decide whether investing in PPF suits your needs or an SIP is a more efficient way to achieve your financial goals.