SIP Vs PPF: Comparison, Returns & 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.

What is SIP?

Systematic Investment Plan (SIP) is a disciplined and flexible investment strategy that allows individuals to invest a fixed amount regularly in mutual funds. Investors can choose the frequency (monthly, quarterly, etc.) and the amount they want to invest. SIP promotes rupee cost averaging, as investors buy more units when prices are lower and fewer units when prices are higher. It is a convenient way for individuals to enter the equity market gradually, reducing the impact of market volatility.

Who should invest in SIP?

Investing in SIP can yield additional returns, aiding in long-term wealth accumulation. It's particularly beneficial for individuals with medium to long-term financial goals, such as planning for marriage or children's education. SIPs are suitable for those seeking professional management with limited funds. However, understanding the risk profile of Mutual Funds is crucial before investing.

Things to know before investing in SIP

Before investing, grasp key terms like Expense Ratio and Exit Load. Review any increases in regular investments after a specific period to understand the investment better. Clearly define your investment horizon, risk profile, and investment objectives to align your SIP investments with your financial goals.

What is PPF?

Public Provident Fund (PPF) is a long-term savings and investment instrument backed by the Indian government. It offers a fixed interest rate and tax benefits. Individuals can open a PPF account with a minimum deposit and contribute annually. The investment has a lock-in period of 15 years, but partial withdrawals are allowed after the sixth year. PPF is known for its safety, tax-free returns, and suitability for long-term goals like retirement planning and wealth accumulation.

Who should invest in PPF?

Public Provident Fund (PPF) is suitable for individuals looking for safe and long-term investment options. It is particularly beneficial for:

• Individuals seeking stable and secure returns: PPF offers guaranteed returns and is backed by the Government of India, making it a safe investment avenue.
• Those planning for retirement: PPF provides a reliable source of income during retirement years, as it offers tax-free withdrawals and accumulates savings over a 15-year period.
• Investors looking for tax benefits: Contributions made towards PPF are eligible for tax deductions under Section 80C of the Income Tax Act, making it an attractive option for tax planning.
• Individuals with a low to moderate risk tolerance: PPF carries minimal risk compared to market-linked investments, making it suitable for conservative investors seeking steady growth.

Things to know before investing in PPF

Before investing in PPF, it is essential to consider the following factors:

• Lock-in period: PPF has a lock-in period of 15 years, during which premature withdrawals are generally not permitted except under specific circumstances.
• Tax benefits: Contributions made towards PPF qualify for tax deductions under Section 80C of the Income Tax Act, with tax-free interest and withdrawals at maturity.
• Interest rate: The interest rate on PPF is set by the government and is subject to change periodically. Investors should be aware of prevailing interest rates before opening a PPF account.
• Contribution limits: The minimum and maximum contribution limits for PPF accounts are determined by the government and may vary from year to year.
• Flexibility: PPF offers limited flexibility in terms of withdrawals and premature closures, making it more suitable for long-term financial goals.
• Nomination facility: PPF accounts allow investors to nominate beneficiaries to receive the proceeds in case of the investor's demise.
• Risk-free nature: PPF is considered a risk-free investment avenue as it is backed by the Government of India, offering investors peace of mind regarding the safety of their savings.

Difference Between SIP and PPF

SIP or PPF Which is Better?

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 7.1% 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.