While planning your wealth generation to achieve long-term financial objectives, two of the most desired options usually find their place in the limelight: Systematic Investment Plans (SIPs) and Public Provident Fund (PPF). If you intend to invest Rs 1,25,000 every year for 15 years, the query comes to mind: which of them will help you generate a greater corpus? Both investment options have unique characteristics, and knowing their advantages and disadvantages is important to make the correct choice for your financial future. Let’s explore a comparison of SIP vs PPF and find out which one might yield a better return on your investment.
What Is SIP (Systematic Investment Plan)?
A SIP is a systematic method of investing in mutual funds, where an investor invests a certain amount of money at regular intervals, usually monthly or yearly, into mutual fund schemes. The money is invested in a range of assets such as equities, debt instruments, or a combination of both, depending on the mutual fund scheme selected.
What Is PPF (Public Provident Fund)?
PPF, however, is a risk-free long-term savings scheme sponsored by the government with a rate of interest that is determined by the government. It has a 15-year lock-in period, tax-free returns, and tax deductions under Section 80C. The interest rate on PPF is changed every quarter by the government and is now in the range of 7% to 8% per year.
Here Are the Key Differences Between SIP and PPF:
Return Potential:
SIP: The return on SIP will be based on the performance of the mutual fund you select. In the long run, historically, equity-based mutual funds have given returns in the range of 10-15% annually, but returns are volatile in nature. It implies that there is a likelihood of higher returns but with higher risk.
PPF: PPF is a safe investment with fixed interest rates determined by the government. The interest rate for PPF usually ranges from 7-8% per year, along with the advantage of tax-free returns. Though returns are lower than in equity investments, PPF provides security and stability.
Risk Factor:
SIP: Equity investments are market sensitive, so SIP is riskier, especially for short-term horizons. If you remain invested for the long term, though, the market volatility risk decreases, and the returns get averaged out.
PPF: Government-backed PPF has no market risk and has guaranteed returns. It is perfect for risk-free investors seeking sure-shot, stable returns in the long run.
Liquidity:
SIP: Mutual funds provide liquidity since you can redeem your units at any time. Nevertheless, if you put your money into equity-oriented funds, you will need to stay invested for a minimum of 3-5 years to weather market fluctuations.
PPF: PPF comes with a 15-year lock-in, during which you can make partial withdrawals after the 6th year. Thus, it is not as liquid as SIP but provides discipline in saving over the long term.
How Rs 1,25,000 Annual Investment Performs in 15 Years?
Let us now come to see how much corpus you will be able to gather over 15 years with an annual investment of Rs 1,25,000 in SIP and PPF. We have assumed constant rates of return.
SIP Investment Scenario:
Consider a case where you invest Rs 1,25,000 each year in an equity mutual fund that has returned an average of 12% per annum. After 15 years, your corpus from that investment would amount to about Rs 51.7 lakhs.
PPF Investment Scenario
The same Rs 1,25,000 invested annually in a PPF with an assumed interest rate of 7.5% p.a. for 15 years would fetch around Rs 34.9 lakhs.
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Comparison and Conclusion
SIP in mutual funds has the potential to create a higher corpus due to its higher return rate, while PPF offers more stability but lower returns. If you seek higher returns and can handle some risk, SIP is the better choice. However, if stability and safety are your priorities, PPF is ideal. A balanced mix of both can also be a good strategy.
Final Words
SIP and PPF both have some distinct advantages on your financial objectives and risk. It is wise to make decisions if you can know the basics and the future that might hold in store. In case of more help, to plan and decide on investing, you are always welcome at VSRK Capital, one of the esteemed mutual fund distributors.
FAQs
1. Is SIP riskier than PPF?
Yes, SIP in mutual funds is riskier than PPF because mutual fund returns depend on the market’s performance, which can be volatile. However, over the long term (15 years in this case), the risk of market volatility reduces, and SIP can provide higher returns compared to PPF.
2. How can a financial advisor help me decide between SIP and PPF?
The risk tolerance, financial goals, and time horizon could be assessed before an appropriate investment strategy is proposed by a financial advisor. Whether SIP, PPF, or a combination of both would work for you will be decided. A financial advisor will help in choosing the mutual funds to invest in through your SIP and can also give valuable insights into tax-saving strategies and investment diversification.
