ELSS vs PPF – Which is better to invest money?

ELSS VS PPF

We all have some dreams to be achieved either for ourselves or for our children. And we work very extensively in order to achieve those dreams. Working hard on a job would not be enough to achieve our precious dreams and hence require a helping hand in the form of investing. One will be in a better position to achieve ones goals by just planning his/her finances well. There is one simple rule of 50:20:30 which states that one should separate his income in the said ratio in order to manage his finances well. The ratio suggests that one should earmark 50% for ones mandatory expenses, 20% for savings and 30% for discretionary expenses.So one should set aside at least 20% of his income towards his goals. One wise man has said you can become rich if you are not earning but your investments are earning for you.

ELSS or Equity linked saving schemes is the only tax saving category of equity mutual funds which are offered by various AMC’s. They are similar like the other equity schemes except of the fact that they allow the investors to avail tax deduction u/s 80C of Income Tax Act, 1961 and lock in period of 3 years. Investor can invest in lumpsum or through SIP’s as per their convenience and goals.

PPF or public provident fund is a saving scheme offered by Government of India which is available to all citizens of the country. The investor will receive a fixed rate of interest which is decided by the government on quarterly basis. The investment in PPF comes under EEE category which means that the investment, accruing interest and the withdrawals are exempted from tax. However one must remember that there is a lock in period of 15 years.

ADVANTAGES OF INVESTING IN PPF

• Assured returns.
• Risk free.
• Provides liquidity through partial withdrawals and loan facilities.
• Enjoys EEE tax status.
• Tool for small savings as one can contribute as low as Rs 500 to his PPF account.

DISADVANTAGES OF INVESTING IN PPF

• Real rate of return is very low as they offer lower rate of interest which fails to beat the inflation rate.
• Lock in period is of 15 years.
• The maximum amount of investment in a financial year is capped at Rs 150000.
• One can not hold PPF account jointly hence it is not a good family savings tool.

ADVANTAGES OF INVESTING IN ELSS

• Inflation beating returns.
• Lock in period is just 3 years.
• Minimum investment required is just Rs 500 and there is no upper cap limit on investments.
• No restriction on number of withdrawals after the lock in period gets over.
• ELSS allows holding investments jointly.

DISADVANTAGES OF INVESTING IN ELSS

• One cannot redeem investments before 3 years, however in case of PPF this period is 15 years.
• Returns from ELSS are market linked and hence some risk is involved. However, over a period of time this risk is eliminated and superior risk adjusted returns are generated by ELSS..

Now the important question which comes in every investors mind is where should they invest. So in this particular section we are going to discuss about ELSS and PPF. For the ease of the readers we will be discussing these in detail by comparing them on various parameters:

1. RETURNS
We all know that the more risk we take, the better will be the reward. The same is with ELSS. There is no fixed rate of return in case of ELSS while one may expect to earn about 15-18% over a period of time. While in case of PPF the returns are fixed and one will surely get the returns which the government have notified. The returns for the Q1 FY 19-20 is 8% p.a. compounded annually. One must account for inflation when talking about the returns and hence one should always have exposure in both PPF and ELSS based on your risk profile.

In the following table you can see the wealth that will be created by investing RS 100000 for 15 years at varying rate of interest.

So you can easily see the difference between the wealth grown @8% which you will get in case of PPF and the wealth grown in case of ELSS. The difference is substantial enough to make big differences to your wealth over a period of time. Hence it is better to invest in ELSS than PPF over a long period of time.

2. LOCK IN PERIOD
The lock in period in case of ELSS is 3 years which is the lowest among all the instruments which offer tax benefits. One must keep a note of the fact that in case of SIP’s each and every installment will be locked for 3 years.

On the other hand in case of PPF, there is a lock in period of 15 years. However one has the option of applying for a loan from the third financial year till sixth financial year. Even in case of ELSS one has the option of taking a loan against units. Also in order to make PPF investor friendly the government has allowed partial withdrawals from 7th year onwards in certain cases.

But all in all, ELSS is a better way to save and invest your money than PPF.

3. TAXABILITY
ELSS were enjoying the EEE tax status until the new announcement in budget which imposed tax on LTCG from equity related mutual funds and hence now they enjoy EET tax status. Although the tax is to be paid only on the capital gains above 1 lakh in the financial year at 10% which is not too much.

For eg. Suppose you have invested Rs 200000 in an ELSS fund and after 5 years the value of the corpus becomes X and you want to find your tax liability:-

So on a capital gain of Rs 150000 one needs to pay only 5000 in taxes.On the other hand PPF enjoys EEE tax status. The investor can avail deductions u/s 80C for the investment made, and no tax is to be paid on accruing interest and withdrawals on maturity. This makes PPF the most favored fixed income instrument.

However, in our view one should not refrain themselves from paying just 10% in taxes on capital gains from ELSS as they are capable of generating higher tax adjusted returns which will compensate for the taxes to be paid by the investors.

4. COST
There is a hidden cost associated with PPF because there is no clarity given by the government except for fixed rate of returns while on the other hand one needs to pay charges in case of ELSS which are equal to the expense ratio of the particular scheme. These charges may vary from fund to fund depending on the AMC’s policies. But don’t forget the returns you get in case of PPF which are way too less than ELSS and which matters the most and makes all the difference in your wealth.

Also the expense ratio of the funds have come down considerably because of SEBI regulations which puts investors in a better position and have helped them enjoy better returns.

5. CONVENIENCE
One can invest in ELSS either online or offline either by taking help of the advisors or themselves. One needs to complete their KYC in order to invest, once that is done the investor is good to invest.

On the other hand PPF accounts are offered by various banks and post offices. One can open a PPF account with either of the two. One can apply for a PPF account online but he has to visit the branch for submitting some documents. But once an account is opened the investor can put more money into his PPF account online or by visiting the branch of a particular bank or post office.

6. SUITABILITY
Both the instruments may appeal to different sets of people. PPF may appeal to risk averse or conservative investors who want fixed income along with capital protection. While ELSS is suited for aggressive investors who are ready to take some risk and can ride the volatility with ease and want to earn higher returns.

7. TRANSPARENCY
PPF score low on transparency in comparison to ELSS. PPF invest in both debt and equity but there is no such information available as to where they are exactly parking investors funds. While on the other hand ELSS mutual funds provide factsheets to its investors on monthly basis. These factsheets contains information regarding the funds allocation across different sectors and different stocks.

8. MINIMUM AND MAXIMUM SUBSCRIPTION
One can invest a minimum amount of Rs 50 in PPF while the maximum amount that can be invested in a financial year is Rs 150000. While there is as such no compulsion in case of ELSS with respect to number of contributions. One can invest as low as Rs 500 and there is no limit on the upward side. Also, there is nothing like compulsory minimum investment to be made in case of ELSS while in case of PPF a minimum investment of Rs 500 p.a. is required in order to keep the PPF account active.

FAQs

Q1. Is it better to invest in ELSS than PPF considering a long term horizon?
A. Yes, one should prefer ELSS over PPF in the long term as the former will be able to multiply your wealth much faster because of the superior risk adjusted returns they generate.

Q2. Which is the better instrument to invest and save money, a PPF or an ELSS?
A. Both the instruments are different in nature. If the investor is conservative then he may go for PPF while if he can take some risk and want to earn higher returns then ELSS should be the preferred choice.

Q3. How should I keep balance between investment in ELSS and PPF and other schemes?
A. One should be very careful while deciding the fund allocation. One should align his/her goals to the investments.

Q4. How much tax will I be able to save if I invest in ELSS?
A. Well for a person who is in higher tax bracket say 30% will stand to save a maximum of Rs 46800 i.e. (150000*30% + cess).

Q5. Why should I invest in ELSS over any other tax saving instrument?
A. ELSS provides all those benefits which an investor look for in an investment product. Be it tax deductions, returns, liquidity, etc. Also it has the lowest lock in period of 3 years.

Q6. What should be the preferred way of making investments in ELSS - SIP or lumpsum?
A. One can make lumpsum investment anytime in ELSS funds, however it is always better to invest through SIP’s as one can be benefitted due to rupee cost averaging as equity markets are volatile in nature.

Q7. I am a new investor, is it recommended to make my first investments in ELSS?
A. Yes, one should invest in ELSS funds as long as your 80 C deduction limit i.e. Rs 150,000 does not get exhausted.

Q8. Are capital gains from ELSS taxed?
A. Yes, the capital gains over and above Rs 100000 are taxed at 10%. For eg. If you have booked capital gains worth of Rs 180000 then you will have to pay tax on only Rs 80000 i.e. 8000.

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