PPF vs ELSS ….. Another Take

PPF vs ELSS …..     Another Take

 

Public Provident Fund vs. Equity Linked Savings Scheme

It is necessary to understand what these small savings schemes actually mean and how they operate before we actually stack them up against each other to find out which one is better for which situation.

What is Public Provident Fund?

Public Provident Fund, popularly abbreviated as PPF is a scheme issued by the Government of India under the small savings tier. They have inherent tax savings and investment features associated with them. They fall under the postal savings schemes of the Indian Postal Service. It is an investment scheme mainly designed for the self-employed individuals and workers of unorganized sectors to provide them with income security at old age. It is a fixed income security scheme that enables one to invest a minimum amount of INR 500 and a maximum of INR 150000. One can have guaranteed and tax free returns by investing in a PPF account. Deposits under PPF earn interest at a rate of 8.70% per annum as of April 2014. PPF accounts have a lock-in period of 15 years and the investments are tax deductible along with the fact that the returns are completely tax free.

What is an Equity Linked Savings Scheme?

Equity Linked Savings Scheme, otherwise known as ELSS, is an instrument of savings and investment offered by many banks that is closely related to prevailing market conditions and is a diversified mutual fund which invests most of the corpus into equities. A minimum investment of INR 500 is required and it has no cap on the maximum investment. The deposit scheme has a mandatory lock-in period of 3 years, after which all the investment and the returns can be withdrawn. These specialised deposits have no fixed interest rate and the returns at the end of the maturity period are not taxable. As with market linked investments, these have a certain higher profile of risk, but also present a better case of gaining more returns than any other savings scheme that relies on fixed income instruments.

Public Provident Fund vs. Equity Linked Savings Scheme

Now that we have had a refresher course in what each of the savings scheme actually does, let’s take a look at how each of these stack up against each other in comparison of features.

Public Provident Fund

Offering more returns over a sizably longer investment period, these are stable financial instruments that have added tax benefits.

1. Rate of Interest – As mentioned above, these instruments offer interest at a rate of 8.7% per annum, compounded yearly and being effectively added to the balance amount per year
2. Financial Liquidity – Mandatory lock-in periods of 15 years makes this investment scheme a choice for long term goals, rather than something in the near future. Consequently, when PPFs are extended beyond the 15-year mark of lock-in, the associated returns also increase significantly
3. Taxable returns – The investments are tax deductible and the returns enjoy tax exemption as under Section 80C of the IT Act, making the effective returns through PPF even higher
4. Premature withdrawal of funds – PPFs give a hard time when it comes to withdrawing investments before the maturity of 15 years is done. Only under cases of the demise of the account holder, forfeiture of account by a gazetted officer or by order of law is this possible
5. Loans – Having lock-in periods of 15 years and being stable financial instruments, PPFs can easily be used as collaterals for availing loans for vehicles, housing and other secured loans
6. Investment Security – Provided by the Government of India, PPFs offer rates that rarely change in a major way and are one of the safest possible investments one can make in India

Equity Linked Savings Scheme

A relatively newer savings scheme offered through many banks, these came into being to encourage the habit of investment among the common folk who are interested in mutual funds and the potential higher returns of the market.

1. Rate of Interest – These financial instruments offer variable rates of interest since they are linked to the market. The rates overall offered by ELSS could range over 16 percent to 24 percent per annum, taking into consideration extreme lows that might be experienced in the equities market
2. Financial Liquidity – With a mandatory lock-in period of only three years, one can easily revert to ELSS funds in case of any need in the immediate future. The returns obtained after a longer period of investment will depend upon how market-smart a person is
3. Taxable returns – The returns on Equity Linked Savings Scheme investments are not taxable. Since the lock-in period is only of 3 years, there are no taxes from long term capital gains either
4. Premature withdrawal of funds – Closing a ELSS investment by premature withdrawal of funds is not allowed, not until the lock-in period of 3 years is done
5. Loans – Equity Linked Savings Scheme investments are market dependent instruments and can only be used as collaterals for availing loans for vehicles, housing and other secured loans after the lock-in periods are over. Better rates can be availed on loans, if investments are pledged with banks that offer the particular ELSS schemes
6. Investment Security – Being a market linked investment, ELSS have a higher degree of risk when it comes to the invested money

Large Spends through Small Savings

PPF and ELSS are different products, considering one relies on fixed income instruments and the other on equities. A healthy combination of both should be present in any investor’s portfolio. In case an ELSS relies too heavily on equity exposure, one could remain wary if market risks are something one is not comfortable with. At the same time, ELSS investments have a lesser lock-in period and can be handy when a sudden need of liquidity arises. It is advisable, thus, to continue smaller investments in PPFs for an expense one considers taking a longer while to decide. Considering an ELSS that lesser exposure to equity, one could build a strong investment portfolio by keeping the investments stable until the market rallies, and then walk away with a profit.

 

Happy Investing

Source:Bankbazaar.com