25 Apr PPF vs. ELSS Mutual Funds: Where to invest?
Last week a client of ours called to understand a few things on taxation, out of them one of the queries was on year-end tax saving declaration & investments. Continuing the old norms, he decided to invest a lump sum amount of 1,50,000 towards the PPF account to benefit of section 80c of the income tax act. We suggested ELSS Mutual Funds but he denied saying it is risky & difference in return won’t be much.We happened to share the calculation along with the note which we are sharing here.
Let us assume:
1)You invest 1,20,000 every year in PPF for tax-saving
2)The lock-in period in PPF is 15 years, however, 50% can be withdrawn after 5 years.
3)The returns from PPF now are 7.1- 7.7%
4) What about risk? PPF is ultra-safe, and being run by the government of India, there is a huge comfort.
Let us assume:
1) You invest the same amount Rs 1,20,000 in ELSS tax-saving Mutual Fund schemes
2) Lock in period is 3 years
3) Returns are market-linked, however, historical returns of mutual funds from the last 15 years are north of 13-17%, but being conservative let us assume it to be 12% pre-taxes.
4) When you redeem mutual funds ( at maturity) returns above 1 lac are taxable at the rate of 10%, any capital gains arising until the redemption are not taxable.
Finally, let us check what you will make:
PPF
Invested amount of 10,000 per month
Total investment after 15 years = 1800000
Returns CAGR% = 7.1%
Returns: 14,54, 567
Taxes will be zero
Final Maturity Amount = 1800000+ 1454567 = 3254567 (32.5 lacs)
ELSS Mutual Funds
Invested Amount 10,000 per month |
You see, the difference between the two is large.
What about Risk?
We would not call ELSS mutual funds as risky, rather would call them volatile as they invest money in equities and chances of equities producing negative return over the long term is less at least that’s what we have seen in past .
With that note, We convinced him to add 30-40% of the corpus in ELSS to begin with, and the rest in PPF
Choose your investments wisely, weighing the facts & returns appropriately
Mutual funds investments are subject to markets risk, returns discussed here are not assured but a conservative assumption