PPF (public provident fund) and SIP (systematic investment plan) are long-term financial avenues. In both products, you are required to make a periodic contribution to accumulate the required corpus. However, note that both instruments belong to distinct asset classes. While PPF is a fixed-income instrument, an SIP is a way to invest in a market-linked product. Thus, both products have distinct returns and risks associated with them. Here is a comparative analysis between the two financial products to help you understand them.
What is a mutual fund SIP?
An SIP is a market-linked investment mode, just like a recurring deposit through which you can invest in your preferred mutual fund scheme over a long time period. As SIP requires you to invest a small amount on a periodic basis, you can begin with mutual fund investment as soon as you start your work career. This means, to begin your market-linked investment, you do not require waiting long to gather a huge amount to invest the same in one shot. Also, as SIP allows you to periodically invest, this mechanism helps you build financial discipline and imbibe the habit of regular investing. The other benefits offered by SIP are compounding and rupee cost-averaging.
PPF is a government-backed scheme that provides flexibility in investment. This provision allows you to deposit a specific fixed lumpsum amount annually or as periodic monthly instalments. Unlike SIP, as this financial product is backed by the government, it is a safe investment offering assured returns. However, note that while the returns are assured in PPF, it is lower than in SIP mode.
Here is a comparative analysis –
Both SIP and PPF require you to systematically contribute a small amount on a periodic date. You can begin investing in both financial options with an amount as low as Rs 500. However, PPF permits a maximum investment of only Rs 1.50 lakh annually. So, clearly, if you are eyeing to invest a bigger amount, SIP is a better choice.
Investment in SIP is market-linked so the return on this instrument is subject to market fluctuations, meaning your returns would be based on the performance of the market. The only way to get a higher return in SIP is by staying invested for a long term for a span of at least five years or above.
With PPF, there are minimal market risks involved owing to their sovereign nature. They are government-backed schemes, and they provide guaranteed returns.
SIP mutual fund is known for providing liquidity. You can liquidate the investment in SIP funds anytime usually at no expense ratio. However, PPF does not provide the same benefit. Typically, PPF offers a long lock-in of 15 years.
Which option is best for a 24-year-old?
A 24-year-old usually has fewer responsibilities and liabilities towards family than their older counterparts and hence has the potential to invest in markets a small amount to generate high returns over the long term. Thus, it is recommended to begin with SIP investment in equity funds at this age. Also, this age group can consider investing a small part of their investment in PPF to diversify their investment portfolio and gain the benefit of stability and capital preservation features.