Mutual Funds vs PPF: You won’t believe who’s winning over Indian investors

Mutual fund vs PPF: Imagine that you have two options to invest your hard-earned money. Option A offers a 7.1 per cent return, while option B offers an average return of 12 per cent in the long term. What would you choose? Option B, right? After all, the difference of about 5 percentage points is significant, and we all aim for maximum returns from our investments.

But—there’s an exception to the rule.

Surprisingly, Reserve Bank of India (RBI) data has revealed a different trend. Despite lower returns, PPF is attracting three times higher investments than mutual funds. In FY24, investors poured nearly ₹7.18 lakh crore into PPF, while mutual funds drew around ₹2.38 lakh crore—just one-third of the amount.

In FY23, investments in PPF amounted to ₹6.26 lakh crore, compared to ₹1.79 lakh crore in mutual funds. In FY22, the total PPF investments in India stood at nearly ₹5.52 lakh crore, while mutual funds attracted approximately ₹1.16 lakh crore. See the table below:

(Source: RBI data)

It is important to note that the preliminary estimates for FY24 are subject to revision when the National Statistical Office (NSO) releases the first revised estimates of national income, consumption expenditures, savings, and capital formation.

A PPF is a government-backed investment option where investors can deposit between ₹500 and ₹1,50,000 per financial year, with a maximum tenure of 15 years.

In contrast, a mutual fund is a pooled investment vehicle where money from multiple investors is invested in equities, bonds, money market instruments, and other securities managed by a professional fund manager.

Performance

PPF currently offers a 7.1 per cent interest rate. Assuming this rate remains unchanged, if you invest ₹1.5 lakh every year, at the end of 15 years, you’ll receive a tax-free corpus of ₹47.43 lakh.

However, if you invest the same amount in mutual funds, assuming a 12 per cent return, you could accumulate a corpus of ₹75.68 lakh, which would be subject to a 12.5 per cent tax on profits exceeding ₹1,25,000.

Despite the significant difference in returns, why do people still prefer PPF? The answer lies in the risk.

Why PPF IS STILL THE KING?

Risk factor

Investors who avoid taking risks prefer PPFs over mutual funds. One reason for this is the sovereign guarantee, as the PPF is backed by the Government of India.

“Investors generally prefer PPF to mutual funds because it guarantees them great safety, better returns and significant tax benefits. Since PPF is a government-backed instrument, it is issued at a rate of interest fixed in advance and hence offered to people who hate taking risks as it guarantees their growth. On the other hand, mutual funds do have their downsides and do involve greater risk,” according to Saif Ahmad Khan, founder of LEDSAK AI.

As mutual funds are related to the stock market, they have a higher risk than a PPF; hence, they are not preferred among conservative investors.

“Mutual funds are linked closely to the market, despite their enormous potential towards yielding higher turnouts, a more aggressive approach to the market is always needed. Many investors, especially those who are just nearing retirement or have minimal risk tolerance, would prefer an investment that offers the PPF as it focuses more on preserving the capital instead of expanding or growing the wealth,” according to Siddharth Maurya, founder and managing director of Vibhavangal Anukulakara Pvt Ltd.

Tax benefits

The demand for PPF is high compared to a mutual fund, as it offers tax benefits. PPF falls under the Exempt-Exempt-Exempt (EEE) category. Hence, all the deposits made under this are deductible under Section 80C of the Income Tax Act. The EEE category is when your investment, the interest earned on it and income generated at the time of withdrawal are not taxable.

“PPF is EEE, which means one can get triple tax benefits by investing in maturity insurance. For investment up to 1.5 lahks, one can get a tax deduction according to section 80C as well as tax-free interest and tax clear redeem all for PPF. This allows an investor looking for long-term PPF investment a great safe option to gain wealth while avoiding heavy taxes,” Maurya said.

Meanwhile, profits from mutual fund investments are called ‘Capital gains’. Therefore, these capital gains are subject to tax.

“An equity-linked scheme can always be affected by the general market and competition, and as a result, investors will always find themselves paying taxes due to product growth – short-term capital gain is 15%, and long-term capital gain of over 1 lakh is 10%. Because of this tax burden and volatile market, it is common for conservative investors to gravitate towards safer alternatives like PPF funds,” Khan said.

Where should you invest?

Before investing in PPFs or mutual funds, investors must weigh the risks and returns factors.

“Investing into mutual funds may put you through more risk but its rewards can outweigh it too, the most ideal scenario in this case would have to be an equal focus on both high and low risk investment portfolios. For example, investors with less investment experience can focus on investing chiefly in equity mutual funds as these have the potential to yield great returns due to both compounding and the appreciation of the market,” Maurya said.

“On the other hand, investing a small percentage in the PPF guarantees a safe and tax-efficient investment. Investors with the intention of retiring should, however think of increasing their allocation to stable investments like invested into PPF or into debt mutual funds so as to protect their invested capital,” he added.