Is PPF better than ELSS?

Published on: Mon Aug 21 2023

Investment options are plentiful in the Indian financial market. Two instruments that have garnered immense popularity among tax-savers are the Public Provident Fund (PPF) and the Equity-Linked Savings Scheme (ELSS). Both offer tax benefits under Section 80C of the Income Tax Act, but they cater to different risk profiles and offer varied returns. So, which is better – PPF or ELSS? Let's delve deep into both to answer this pressing question.

Public Provident Fund (PPF)

Overview: PPF is a government-backed, long-term savings-cum-tax-saving instrument. It is favored for its security, predictable returns, and tax advantages.

Features:

Duration: PPF has a tenure of 15 years, extendable in blocks of 5 years.
Interest Rate: Set by the government, reviewed quarterly. Traditionally, PPF offers a moderate interest rate, higher than regular savings accounts.
Minimum and Maximum Investment: Annually, you can invest as little as INR 500 to a maximum of INR 1.5 lakh in PPF.
Taxation: The PPF follows the EEE (Exempt-Exempt-Exempt) model. This means the investment amount, interest earned, and maturity amount are all exempt from tax.

Advantages:

Guaranteed and Tax-Free Returns: Your capital is safe, and the returns, though not very high, are assured and exempt from tax.
Loan Facility: From the third to the sixth year, one can avail a loan against their PPF balance.
Withdrawal: Partial withdrawal is possible from the seventh year onwards.

Equity-Linked Savings Scheme (ELSS)

Overview: ELSS is a type of diversified equity mutual fund. It provides the dual advantage of potential high returns due to equity exposure and tax benefits.

Features:

Duration: ELSS funds come with a mandatory lock-in period of 3 years.
Returns: Unlike PPF's fixed returns, ELSS offers market-linked returns. This means they have the potential for higher gains, but with increased volatility.
Minimum Investment: You can start investing in ELSS with as little as INR 500.
Taxation: ELSS also follows the EEE model, making it tax-efficient. However, if your returns exceed INR 1 lakh in a year, you're liable to pay a Long Term Capital Gains (LTCG) tax of 10%.

Advantages:

Potentially Higher Returns: Due to exposure to equities, ELSS has the potential for significantly higher returns compared to PPF.
Shorter Lock-in Period: With just a 3-year lock-in, ELSS offers more liquidity than PPF.

Comparing PPF and ELSS

Risk: PPF is virtually risk-free, being backed by the government. ELSS, being equity-oriented, carries market risks but offers potentially higher rewards.
Returns: Historically, equity has outperformed other asset classes over the long term. So, while ELSS can offer superior returns, they aren't guaranteed. PPF provides steady but moderate returns.
Liquidity: ELSS offers better liquidity due to its shorter lock-in period.
Tax Efficiency: Both offer excellent tax-saving benefits, but ELSS may attract LTCG tax if returns exceed a threshold.

Which One Should You Choose?

Your choice between PPF and ELSS should be based on:

Risk Appetite: If you're risk-averse, PPF is your go-to. If you're open to taking some risk for potentially higher returns, consider ELSS.
Investment Horizon: For longer horizons, having a mix of both might be beneficial. PPF ensures a portion of your capital remains secure, while ELSS can provide the boost of equities.
Financial Goals: If you're aiming for steady wealth accumulation, PPF is apt. For aggressive growth, tilt towards ELSS.

Conclusion

Both PPF and ELSS have their merits and cater to different investment needs. Instead of viewing them as either-or options, consider them as tools in your investment toolkit. Depending on your goals, risk appetite, and horizon, you might find one more appealing than the other, or you might opt for a combination of both. After all, successful investing isn’t about choosing the 'best' instrument, but the most appropriate one.

Do you also want to get BUY/SELL/HOLD recommendations on your favorite stocks with complete analysis?

Are you looking to accumulate wealth through stock market investing?

Receive quick responses to all your investment-related queries with our ‘NIVESHAK GPT’-delivering top-notch information and analysis in just seconds!

Returns are subject to market risk.

Past performance do not assure future returns.

Name: Algonauts Advisory Services Private Limited

Registration Number: INA000017277

Type: Non-Individual

Validity: Oct 28, 2022 - Perpetual

Contact Details (Principal Officer):

Mr.Sharad Sankaran:
(Principal Officer)
Algonauts Advisory Service Private Limited:
Email: principal.officer@algonauts.in
Contact Number: +91 8108832455
Address: 1, Dora Rose, I C Colony, Borivali West, Maharashtra, Mumbai 400103.

Contact details of SEBI office:

Office of Investor Assistance and Education, Securities and Exchange Board of India, SEBI Bhavan, Plot No. C4-A, 'G' Block, Bandra-Kurla Complex, Bandra (E), Mumbai - 400 051.

Disclaimer:

Algonauts Advisory Private Limited (Algonauts Advisory Private Limited) is an investment advisor engaged in the equity advisory business. Algonauts Advisory Private Limited is Sebi registered investment adviser. Algonauts Advisory Private Limited Research Analyst SEBI Registration Number - INA000017277. Algonauts Advisory Private Limited SEBI Registration INA000017277.
Recommendation in reports based on technical and derivative analysis centre on studying charts of a stock's price movement, outstanding positions, trading volume etc as opposed to focusing on a company's fundamentals and, as such, may not match with the recommendation in fundamental reports. Investors may visit www.algonautsadvisory.in to view Technical Research Reports.
The information and opinions in this report have been prepared by Algonauts Advisory Private Limited and are subject to change without any notice. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of Algonauts Advisory Private Limited. While we would endeavour to update the information herein on a reasonable basis, Algonauts Advisory Private Limited is under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent Algonauts Advisory Private Limited from doing so.
This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational purpose and shall not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. Algonauts Advisory Private Limited will not treat recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate the investment risks. The value and return on investment may vary because of changes in interest rates, foreign exchange rates or any other reason. Algonauts Advisory Private Limited accepts no liabilities whatsoever for any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice.
Algonauts Advisory Private Limited or its associates might have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the companies mentioned in the report in the past twelve months.
Algonauts Advisory Private Limited encourages independence in research report preparation and strives to minimize conflict in preparation of research report. Algonauts Advisory Private Limited or its associates or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report.
Accordingly, neither Algonauts Advisory Private Limited nor Research Analysts and their relatives have any material conflict of interest at the time of publication of this report.
Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. Algonauts Advisory Private Limited or its subsidiaries collectively or Research Analysts or their relatives do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of the research report.
Since associates of Algonauts Advisory Private Limited and Algonauts Advisory Private Limited as a entity are engaged in various financial service businesses, they might have financial interests or actual/ beneficial ownership of one percent or more or other material conflict of interest various companies including the subject company/companies mentioned in this report.
Algonauts Advisory Private Limited may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. Neither the Research Analysts nor Algonauts Advisory Private Limited have been engaged in market making activity for the companies mentioned in the report.
We submit that no material disciplinary action has been taken on Algonauts Advisory Private Limited by any Regulatory Authority impacting Equity Research Analysis activities.
This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject Algonauts Advisory Private Limited and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction.