ELSS Vs PPF

What is ELSS?

When it comes to building wealth, most investors are after three things: solid returns, consistency, and a chance to save on taxes. While there are plenty of investment options out there, many of them come with a catch—the returns are taxed under regular Income Tax rules.

That’s where ELSS funds step in. Equity Linked Savings Schemes (ELSS) are a kind of mutual fund that not only invests in stocks but can also offer tax-saving benefits. Basically, they give you a shot at growing your money and reducing your tax burden at the same time.
 

What is PPF?

Public Provident Fund (PPF) stands out as a long-term investment option preferred by individuals looking for stable and relatively high returns. One of the main goals for those opening a PPF account is to ensure the safety of their principal amount. Once their PPF account is set up, investors are provided with a dedicated PPF account, allowing for regular monthly contributions and the benefit of compounding interest over time.
 

Key Features of ELSS (Retain things to know about section)

Safe Investments: Opting for PPF ensures relief from the uncertainties of investment risks. PPF, being a government-backed scheme, features an interest rate that is determined and paid by the government of India. This government guarantee establishes PPF as a secure investment choice for all Indian citizens.

Guaranteed Returns: As PPF is a government-backed initiative, the returns on investment are assured, though not unchanging. The government determines the interest rate for PPF every quarter. Historical data indicates a decline in PPF interest rates from 12% to the current 7.1%. Presently, the PPF interest rate is set at 7.1% for the second quarter of the fiscal year 2022-23 (July-September).  

PPF Lock-in Period: PPF is primarily suitable for investors who are inclined to commit their funds for an extended period. The scheme has a maturity period of 15 years, during which only partial withdrawals are permitted after completing five years of consistent contributions. Following the lock-in period (15 years), investors have the option to extend the tenure indefinitely in blocks of 5 years.  

Tax-exemption: PPF falls within the EEE (Exempt-Exempt-Exempt) category of Income Tax implications. This means that contributions of up to Rs. 1.5 lakh in PPF qualify for deductions under Section 80C of the Income Tax Act. Furthermore, the interest earned on the principal amount, along with the maturity amount, is exempt from taxes. This serves as a compelling reason for individuals to consider PPF as a viable investment option.
 

Key Features of PPF (Retain things to know about section)

Fund returns: Before selecting a fund, assess its performance by comparing it with its competitors and the benchmark to ascertain whether it has consistently outperformed it in the past. While no fund can always be at the top, high-quality funds typically demonstrate a presence in the top quartiles for prolonged periods.    

Financial parameters: Additionally, you may evaluate a fund's performance by considering various parameters such as standard deviation, Sharpe ratio, alpha, and beta. Funds with higher standard deviation and beta indicate higher risk compared to those with lower values. Opt for funds exhibiting a higher Sharpe ratio.   

SIP or Lumpsum: Before committing to an investment in ELSS, it's crucial to decide on the mode of investment—either through SIP or lumpsum. With the SIP method, you invest a fixed amount at regular intervals, usually monthly. Conversely, the lumpsum method involves investing a substantial sum in a single transaction. Generally, the SIP mode is often regarded as the preferable option because it leverages the benefit of cost averaging. This means you receive more units when the market is down and fewer units when it's up. However, if you have a surplus amount, you may also opt for the lumpsum investment approach.  

Growth & Dividend Options: As an investor, you have the choice between growth and dividend options. With the dividend option, you can receive regular income through dividend payouts for the entire duration of your investment in ELSS. If you opt for the growth option, there are no dividend payouts; instead, the dividends are reinvested in the fund to acquire more units and promote capital growth. Reinvesting dividends enhances the Net Asset Value (NAV) of the units, contributing to increased profits for the investor, particularly during favourable market conditions.
 

ELSS Vs PPF: A Detailed Comparison (Retain the table)

Here’s a comparison between ELSS Vs PPF:

Eligibility for ELSS Vs PPF

Eligibility Criteria for ELSS

Eligibility Criteria for PPF

ELSS: Pros and Cons of Investing

ELSS, or Equity Linked Savings Scheme, is a popular tax-saving mutual fund that offers potential market-linked returns with a short lock-in period. While it offers attractive benefits, it is  essential for investors to understand its advantages and limitations before investing. 

Here's a quick look at the pros and cons of ELSS investments.
 

Pros of ELSS

Pros of ELSS (Equity Linked Savings Scheme):

• Eligible for tax deduction up to ₹1.5 lakh under Section 80C
• Shortest lock-in period among tax-saving options (3 years)
• Potential for high returns through equity market exposure
• Low entry point with a minimum investment of ₹500
• Option to invest via SIP for disciplined investing
• Diversified portfolio reduces risk compared to direct stock investments
• Ideal for long-term wealth creation
• No upper limit on investment (only ₹1.5 lakh eligible for tax benefit)

Cons of ELSS

Cons of ELSS (Equity Linked Savings Scheme):

• Returns are not guaranteed due to market fluctuations
• Involves higher risk compared to fixed-income options like PPF or FD
• Lock-in period of 3 years restricts liquidity
• Performance depends on fund manager’s expertise and market trends
• Tax is applicable on long-term capital gains (LTCG) above ₹1 lakh at 10%
• Not suitable for very conservative or short-term investors
• Difficult to predict returns at the time of investment
• Past performance doesn’t guarantee future results
   

PPF: Pros and Cons of Investing

PPF, or Public Provident Fund, is a government-backed savings scheme historically known for its safety and guaranteed returns. It is a popular choice for long-term investors who are seeking tax benefits and capital protection. 

Here's a brief overview of the key pros and cons of investing in PPF.

Pros of PPF (Public Provident Fund):

• Backed by the Government of India, ensuring high safety
• Offers guaranteed, fixed returns, revised quarterly
• Entire maturity amount (principal + interest) is tax-free
• Eligible for tax deduction up to ₹1.5 lakh under Section 80C
• Long-term investment with a 15-year lock-in encourages disciplined saving
• Partial withdrawals and loans allowed after a few years
• Attractive interest rates compared to traditional savings accounts
• Useful for retirement planning and secure wealth accumulation

Cons of PPF

Cons of PPF (Public Provident Fund):

• Long lock-in period of 15 years limits liquidity
• Returns are fixed and may not beat inflation over time
• Maximum investment capped at ₹1.5 lakh per financial year
• Not suitable for short-term financial goals
• No option for joint accounts or early closure (except under specific conditions)
• NRIs and HUFs are not eligible to open new accounts
• Limited flexibility compared to market-linked instruments like ELSS
• Interest rates are subject to periodic revision by the government
   

How to Invest in ELSS and PPF?

When comparing ELSS and PPF, ELSS funds are a type of mutual fund that are eligible for tax deductions under Section 80C. ELSS funds are offered by various Asset Management Companies (AMCs). PPF accounts, however, can be opened through banks, often at the same branch where you maintain your savings account.
 

ELSS Vs PPF: Which One Should You Choose?

Choose ELSS for higher returns and tax savings if you're comfortable with market risks. Opt for PPF if you prefer safety and steady, tax-free returns. A mix of both can offer a balanced approach to growth and security in your investment portfolio.
 

Conclusion

Choosing between ELSS and PPF depends on your financial goals and risk tolerance. If you seek higher returns and can understand market risks, ELSS are ideal for long-term wealth creation. On the other hand, if safety, guaranteed returns, and long-term savings are your priority, PPF is a more suitable option. 

Investors can also consider a balanced approach by investing in both, combining growth potential with financial security. Ultimately, your investment decision should align with your risk profile, time horizon, and financial objectives.