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Public Provident Fund (PPF) vs ELSS: What Rs 5000/month may return in 3, 5, 10 years

ppf vs elss which is better

Equity Linked Savings Scheme vs Public Provident Fund: ELSS and PPF are both excellent tax-saving investments. While conservative investors look to invest in PPF, the aggressive ones pick up equity-linked savings scheme or ELSS. As an investor, you can invest in either of them based on risk profile, which is the ability and willingness to bear risk. ELSS funds are equity diversified mutual funds as they invest across sectors and market capitalization. You can make the investment as a lump sum or an SIP. Equity has been the best performing investment over the long term.

ELSS in an inflation-beating investment: The all-India general CPI Inflation jumped to 7.35% in December 2019 from 5.54% in November. With inflation this high, it is safe to assume a 6% inflation going forward. This could force even a conservative investor to allocate funds towards the ELSS.

Double digit returns

ELSS schemes are known to give double-digit returns. PPF currently offers an interest of 7.9% for the quarter January to March 2020. Even if PPF offers an interest rate of 8% over the coming years, it might fail to give inflation-beating returns.

ELSS has a shorter lock-in period compared to PPF

ELSS has a short lock-in period of just 3 years as compared to the 15-year lock-in of the PPF. You enjoy a higher liquidity on ELSS schemes, which is an advantage in a financial emergency.

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Tax-efficiency

The public provident fund enjoys the EEE tax benefit where the invested amount has a tax deduction under Section 80C up to Rs 1.5 Lakhs a year. The interest earned and the amount withdrawn at maturity is also tax free.

You incur a long term capital gains tax of 10% on ELSS capital gains in excess of Rs 1 Lakh a year. It's widely believed that the EEE benefit makes PPF more tax-efficient than the ELSS.

ELSS schemes could yield double-digit returns, which even after the LTCG tax is higher than the returns from the PPF. This makes it more tax-efficient than most tax-saving instruments. You can maximize the tax benefits by reinvesting the tax-exempt capital gains up to Rs 1 Lakh after the lock-in period in the ELSS scheme, to claim the tax deduction under Section 80C.

ELSS is relatively safe over the long-term. You can invest amounts as low as Rs 500 a month through SIPs in an ELSS scheme of your choice.

PPF vs ELSS: Which gives better returns?

PPF currently offers an interest rate of 7.9%. Let's assume PPF offers this interest rate over the next 15 years. The returns from the ELSS depend on market performance and the fund manager's stock selection.

The table below gives the returns on a Rs 5,000 monthly investment in PPF and ELSS over a tenure of 3 , 5 and 10 years. To gauge the performance of the ELSS, we take the performance of the Nifty 50 TRI (Total Return Index) over the corresponding tenure.

You see that Nifty 50 consistently gave higher returns than the PPF over a tenure of 3, 5 and 10 years. The reason for this is the fund managers of ELSS schemes have to beat the market and many of them do so. This generates wealth and investors with moderate to high risk appetite opt for them.

The Government has been steadily reducing the interest rates on small savings schemes like the PPF. As interest rates reduce, conservative investors search for better investment options. ELSS schemes invest heavily in large cap stocks and with the 3 year lock-in period forcing a long-term investment, they are relatively safe. ELSS is an opportunity to save tax and generate wealth.

(By C.S.Sudheer, Founder and CEO of IndianMoney.com)