Mutual Funds vs. Public Provident Fund

What are the key parameters we look at while allocating funds in a particular investment product?

Returns, liquidity, tax savings, risk/ volatility, time horizon and  lock in. Mostly these are the checklists that most of us follow. In today’s time, both mutual funds as well as PPF are most sought after investments. However, if you are to decide which one to go for when you are selecting investment avenues, it is important to assess both the investment options based on the points mentioned above. Let us explore how these two investment options compare on various parameters.

  1. Risk of Investment

The common adage goes, “Higher the risk, higher the returns”. There are various categories of mutual funds, with widely varying risks. Debt mutual funds come with low risk whereas equity mutual funds are risky products as they invest directly into the shares of the company. However, past data suggests that over long periods of time, this risks in equities evens out. When it comes to PPF Investment, it is totally risk free and is backed by Govt. of India and hence investors can be at peace as the interest as well as principal is secured. PPF related calculations can be done using the PPF calculator.

  1. Returns

In terms of returns, mutual funds have generated greater alpha than public provident fund. This is supported by past data and is true for long periods in time. We all know that markets have the inherent nature of volatility. Therefore, returns can be best seen and compared for long periods of time. Mostly for such periods, we see ample growth in the  investment value.

PPF’s interest currently and over the last few quarters have been in the range of 8% p.a.. In case of equity mutual funds,you can expect returns to range between 12%-18%, depending on the category of the fund. However, in the case of debt funds returns vary in the range of 7-10%. So, if someone invests for a long term horizon, some debt funds can provide better tax adjusted returns than PPF.

  1. Duration of Investment

Mutual funds in this case are more flexible as compared to PPF. This is because the minimum holding period for PPF is 15 years, post which it can be renewed. However, there is no such clause in case of mutual funds. You can invest in these schemes basis your investment needs and time horizon. However, if you are investing inequities it is advisable that you don’t redeem your investments before 5 years.

  1. Tax Savings

PPF fall under the EEE category (exempt, exempt, exempt category), meaning the amount invested is non-taxable, the interest is non-taxable and the amount withdrawn is also non-taxable. The limit for investment for a financial year is limited to Rs. 1.5 lakhs (under Section 80C of Income Tax Act, 1961).

In case of mutual funds, only ELSS (Equity Linked Savings Schemes) can be used for tax deductions up to Rs. 1.5 lakhs in a financial year. Taxes are applicable on all other types of mutual funds.

  1. Benefits of Diversification

PPF can be considered as a safe instrument of investment wherein the returns are guaranteed. Different types of mutual funds serve different type of investment needs. Both the avenues of investments can be used for diversifying your portfolio. If you are looking for safer returns for a long term horizon then you can go for PPF or debt funds. If you are willing to take a little more risk and are  looking for wealth creation in the long run than equity mutual funds in your best option.

PPF vs. Mutual Funds (A glance key metrics of comparison)


Deciding between which investment option to choose is again a matter of individual investment objectives and risk profile. If you have short term goals which require higher liquidity, you should opt for liquid funds under the debt funds category. They are safer options, offer high liquidity and returns to the tune of 7 to 8%. For a long term duration and slightly higher risk appetite you can invest in equity funds for accelerated wealth creation. If you have a low risk profile however, PPF can be a good investment option for the long term. Carry out due diligence before selecting the right investment avenue. To have a balanced portfolio, you can invest a majority of your assets in mutual funds and keep a little in PPF to diversify your risks.

Deciding between which investment option to choose should be completely based on your investment objectives

Though PPF returns look good at 8%, investors should know that these were in double digits a few years ago. The interest rate environment in our country is slowing digressing towards a lower trajectory. However, the returns generated by mutual funds have remained steadied if someone were to look at the historical figures.