Investing Not Recommendation

Which is better? 7.1% PPF returns or 12% mutual fund returns?

September 26, 2023
Craig Pisano

Let’s dive into the comparison between the 7.1% returns of the Public Provident Fund (PPF) and the potentially higher returns of mutual funds, which can average around 12%. It’s important to understand the mechanics, factors, and objectives of both asset classes.

Mechanics and Factors:

  1. Public Provident Fund (PPF):PPF is a government-backed savings scheme in India. It is a fixed-income investment with a current interest rate of 7.1% (as of my last update in September 2021).PPF provides a fixed, guaranteed return that is not subject to market fluctuations. It is considered a safe investment option.
  2. Mutual Funds:Mutual funds pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. Returns vary based on the performance of the underlying assets.Mutual fund returns are subject to market risk. The average return of around 12% is historical and is influenced by the performance of the underlying securities.

Factors Governing Returns:

  1. Risk and Volatility: PPF offers a low-risk, fixed return. It is ideal for conservative investors who prioritize safety over higher returns.Mutual funds have higher potential returns but are subject to market volatility. The 12% average return is not guaranteed and can vary widely.
  2. Inflation: PPF returns might not always outpace inflation, potentially leading to a decline in real purchasing power over time.Mutual funds have the potential to provide returns that beat inflation over the long term, helping to preserve and potentially grow real wealth.

Objectives of Investing:

  1. Wealth Preservation: PPF is often chosen by individuals who prioritize wealth preservation and stability. It’s suitable for those who cannot tolerate risk.Mutual funds can help grow wealth over the long term, aiming for higher returns to meet future financial goals.
  2. Philanthropy and Impact Investing: Some renowned financial planners and advisors emphasize the importance of philanthropy. While PPF might not directly contribute to philanthropic endeavors, mutual funds offer opportunities for impact investing, aligning financial growth with social or environmental goals.
  3. Taxation implications. PPF offers tax benefits on contributions, interest, and withdrawals, making it a tax-efficient long-term savings option. MF, on the other hand, may have capital gains tax on returns and dividend distribution tax, affecting the overall taxation of gains. It’s essential to consider both options’ tax implications before deciding based on your financial goals and risk tolerance.

Expert Views:

  1. Warren Buffett: “Risk comes from not knowing what you’re doing.” Buffett’s quote emphasizes the importance of understanding the risks and potential rewards associated with different investments.
  2. Suze Orman: “The best investment you can make is in yourself.” Orman highlights the significance of education and informed decision-making in the investment process.

In conclusion, the choice between PPF and mutual funds depends on your risk tolerance, investment objectives, and time horizon. While PPF offers guaranteed, albeit lower, returns with minimal risk, mutual funds provide the potential for higher returns at the cost of higher risk. Your decision should be based on a comprehensive understanding of your financial goals and risk appetite.