Should you invest in PPF or ELSS to save tax?

As some of you would have picked up in the recent financial news, the interest rate on PPF has been increased to 8% from 7.6% from this month.  This will again lead to many people wondering if PPF is better than ELSS going forward.

 

While there are many options available to you for saving tax under section 80C, today we will compare PPF and ELSS. You my know that PPF is a debt investment and ELSS is an equity investment. Normally comparing the two would be like comparing apples to oranges. Since these are the most popular investment options for people who have not exhausted their 80C limits with EPF contributions, the comparison is justified.

 

Before we go about comparing the two, let’s understand the basic features of both.

You can invest in PPF by opening a PPF account at your bank or post office. The interest rate on PPF is announced on a quarterly basis.  The current rate w.e.f 1st Oct 2018 is 8%.

The maturity is 15 years, and it can be renewed for a block of 5 years after the maturity. It’s an illiquid instrument and forces you to park your money for 15 years. This can also work to your advantage if you lack the discipline to hold on to your investment for a long time.

 

Equity linked Saving Scheme (ELSS) is an equity mutual fund with a 3 year lock in.  Please note that  not all equity MFs provide tax benefits under 80C, there are certain funds specifically denoted as ELSS that only do so. Since it is equity there is not fixed return like PPF and the returns are based on the market performance.

Having said that they have beaten the PPF returns by a huge margin over the last 10 years. The below table shows returns for Rs 1 Lac invested in various ELSS schemes at the date of inception vs the same amount invested in PPF on the same date. As you can see, over an approx. 20-year period the money has multiplied 55 times in ELSS vs about 5.3 times in PPF. Even over a 5 year period, ELSS has multiplied 2.6 times vs 1.5 times for PPF.

Scheme Name Launch/ Investment Date Amount Invested  Current Value as on 25-09-2018 ELSS Scheme Returns (%) PPF Current Value PPF Returns (%)
Franklin India Taxshield-Growth 10-04-1999 1,00,000 55,36,304 22.89 5,32,755 8.97
HDFC TaxSaver-Growth Plan 31-03-1996 1,00,000 51,10,910 19.1 7,65,027 9.46
ICICI Prudential Long Term Equity Fund (Tax Saving) – Growth 19-08-1999 1,00,000 36,74,500 20.75 5,11,967 8.92
IDBI Equity Advantage Fund – Growth Regular 10-09-2013 1,00,000 2,64,000 21.14 1,52,544 8.7

Source: Advisorkhoj.com

 

Bear in mind the following while making a choice

  • Invest with a long-term horizon of 15 years and stick to it, do not link your investment time horizon to the exit clause of the scheme
  • The returns from equity will be volatile and may even be negative over the short term. Be prepared to hold on to your investment despite double digit negative returns in the interim. If you can digest volatility, see that performance is negative in short runs and still not panic, ELSS may be a good option
  • Importantly your portfolio will have an asset allocation towards both debt and equity. You should choose PPF if you are looking to augment your debt portfolio, though ideally debt investments are made for shorter time frames and equity for longer time frame
  • Last but not the least, important to remember the choice of ELSS fund is also important, and the choice must be made with adequate diligence. In case you are not equipped to do that, you should reach out to your financial planner.

Now that you have seen the pros and the cons of both, what should you do? If your investment is for the long term (i.e. at least > 7 years), I would recommend you invest in ELSS. Expect volatility along the way, don’t panic, don’t withdraw in 3 or 5 years, tighten your seat belts and watch the magic of wealth creation unfold. If the volatility is something you cannot handle, PPF would be your option, but remember that it will only preserve your wealth.

 

 

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