Mutual Fund, PF vs PPF: Which is a Better Investment Option in 2025?

Investment is a tricky business, and if you have your hard-earned money that you wish to grow over a long period, which should be the best mode of investment? The answer to this question is not singular; not all people, including experts, agree unanimously. Keeping the risk factor aside, let us try to understand that if you have a sum of money, say Rs. 80,000, at your disposal, how do mutual funds, fixed deposits, and provident funds compare with each other with regard to returns?

For this reason, it is important to do a mutual fund vs. FD vs. provident fund comparison. Let us understand the mechanics of how the money grows in each of these modes so that you might arrive at an informed conclusion.

• Mutual funds offer the best return on investment—around 12-15% on average, compared to 7-8% interest offered by FD and PPF.
• By far, PPFs yield the least returns as compared to mutual funds and FDs.
• Low liquidity is a major factor that determines low returns for PPFs and FDs.

Mutual funds are financial investments that integrate different profit-making mechanisms like government and corporate bonds, equity, and stocks, and they optimise the return on investment. Before you invest in a mutual fund, you should consult a finance expert to help you navigate through the technicalities of the process so that you can understand the risk factors and invest accordingly.

Let us assume that you have the Rs. 80,000 at your disposal. Now, if you invest this amount in mutual funds, it will associate the best-performing market strategies pertaining to large, mid, and small-cap funds to generate profits. After considering a weighted average of returns from the said funds to be 12% (annually), the calculations suggest that you would be left with about Rs. 7.72 lakhs at the end of 20 years! If we take a more aggressive approach, returns of 20% would mean a total amount close to Rs. 30 lakhs!

Investing in provident funds is fairly easy and hardly constitutes any risk. The Public Provident Fund (PPF) is endorsed by the government and yields a 7.1% return annually. Starting with the same sum of money, i.e. Rs. 80,000, your total return in 20 years will be Rs. 1.77 lakhs.

The return, as you will notice, is quite low compared to returns from mutual funds. Furthermore, you must be aware of certain limitations of the PPF:

• PPF offers low liquidity, as it comes with a lock-in period of 15 years. However, it offers a partial withdrawal facility after a few years.
• As you have already noticed, the return on investment is not robust. The returns seem even smaller when you factor in prevailing conditions like inflation.
• Investment in PPF is not for you if you are looking to make considerable gains over a long period. Furthermore, if you have a disposable sum you are ready to pledge, PPF is not the right place to do so because you can only invest up to Rs. 1.5 lakh in a financial year.

Thus, when it comes to the mutual fund vs. FD vs. provident fund debate, it falls behind mutual funds.

Let us now come to the third mode of investment that we are considering: fixed deposit (FD). Fixed deposits work in the same way that savings accounts do, with two exceptions: a) unlike savings accounts, FDs do not let you withdraw money at will. You can choose to do so, however, at the cost of lost returns, and b) the interest rates offered by banks and non-banking financial corporations (NBFC) are typically higher than what an average savings account offers.

Now, considering your total investment to be Rs. 80,000 at 8% interest over a period of 20 years, the maturity amount will be Rs. 3.90 lakhs. That is much better than what your PPF would yield, but again, not really viable. Furthermore, these are the drawbacks of opening an FD account:

• If you are considering investing in tax-saver FDs to ramp up your savings, the returns won’t be as significant while considering inflation (around 6%).
• The return on investment is not bad, but mutual funds will give you 3-5 times the yield, which is a risk worth taking for a longer period.

Thus, in terms of the mutual fund vs. FD vs. provident fund debate, FDs offer better returns than PPF. However, it is important to mention that PPF enjoys the exempt-exempt-exempt (EEE) status.

Difference between Mutual funds, FD vs PF