ELSS VS PPF: Which is better

Public Provident Fund (PPF) is  one of the best tax saving investments for risk-averse investors. PPF offers the triple benefits of tax saving, risk free returns and tax free returns. As per the provisions of the new Union Budget, investors can deposit up to Rs 1.5 lakhs per annum in their PPF account, resulting in an annual tax saving of up to Rs 47,000/- for investors in the highest tax bracket. The PPF interest rate for the current year is appx 7%.Government has linked this to bond yields which is the need of the hour as per global economy so the proceeds may  may decline or increase as per the bond yield. Reason for this is that the 10 yr govt. bond yield is at all time high at 6%. Interest rates are already softened and hence the bond yield impact on  the PPF rates as well.

PPF Returns:
The return in PPF has declined over the years. From 12% at the turn of the century, it dropped down to 11%, then 9.5%, 9% and finally 7% where is languished for many years. Between FY12 and FY18 the rate hovered around 8-8.5%

ELSS as a tax saving Investment
Comparison of PPF and ELSS Investments 

ELSS vs Public Provident Fund (PPF)
	ELSS	PPF
Lock-in Period	3 Years	15 Years
Investment Limit	No Limit	Rs. 150,000 per year
Maximum Investment for Deduction under 80C	Rs.150,000	Rs.150,000
Minimum Investment	Rs.500	Rs.500
Returns	Based on performance of equity markets	Rates are fixed by the Central government (currently 8.7%)
Risk	Medium to High	Low

Should you invest in PPF or ELSS

• Investors with high risk tolerance should invest in ELSS, while investors with low risk tolerance should invest in PPF. Over a long time frame wealth creation potential is much higher with ELSS, as we saw in the charts above.

• Young investors should opt for ELSS, since they usually have high risk tolerance and a sufficiently long time horizon to ride out the volatility associated with equity investments.

• If you do not have a PPF account and you are 15 or 20 years away from retirement, you should open a PPF account and start making regular deposits, so that you can accumulate a corpus by the time you retire. As you approach retirement, your risk tolerance goes down and PPF is a better investment option in such a situation.

• Investors with moderate risk tolerance level can invest in both PPF and ELSS in accordance with their optimal asset allocation strategy. You can read about some general asset allocation guidelines in our article, Asset Allocation strategies for different age groups.

• Salaried individuals are mandatory required to contribute a portion of their salary to employee provident fund (EPF). The EPF interest rate is similar (slightly lower) to the PPF interest rate and the maturity amount is tax free. The EPF contribution of the employee goes towards the 80C tax savings. Therefore they should opt for ELSS, unless they are near retirement. Investment in ELSS through systematic investment plans (SIPs) over a long time horizon will help you both in tax planning and retirement planning.

• Self employed individuals should make regular PPF deposits for their retirement planning. It is a good idea to extend your PPF even beyond maturity in blocks of 5 years, if you do not need the liquidity immediately. You can continue to make deposits to your PPF. Even if you cannot make deposits every year, you can stay invested in PPF and your accrued balance will continue to earn tax free interest.

• Investment horizon is another important consideration, in deciding between PPF and ELSS. The tenure of PPF is 15 years with very limited liquidity during the term of the investment. If you have an investment horizon of 5 to 10 years for any specific financial objective, then you cannot rely on PPF. ELSS may be a good investment choice for a 5 to 10 year time horizon, provided it is suitable for your risk profile.

Liquidity Considerations

• The tenure of PPF is 15 years and is extendable in blocks of 5 years. While liquidity of PPF is lower than other tax saving fixed income investments, PPF does offer limited liquidity options through withdrawals and loans, during the term of the investment. Withdrawals not exceeding 50% of fourth year balance or 50% of the balance at the end of the immediate preceding year, whichever is lower, are permitted after a lock-in period of 7 years. PPF also offers loan facilities from third year onwards under special circumstances. The loans can be availed between third and sixth year, and should not exceed 25% of the balance second immediate preceding year. Rate of interest of the loan will be 2% more than prevailing PPF rate and the loan must be repaid in two years. The withdrawal and loan facilities notwithstanding, PPF is essentially a very long term investment. Investors must be prepared to wait for at least 15 years to get the maturity amount.

• ELSS has a lock-in period of three years from the date of the investment. In other words, investors will not be able to redeem their units for the first three years. If you invest in an ELSS through a systematic investment plan (SIP), each SIP investment will be locked in for three years from their respective investment dates. You can opt for both growth and dividend options. But you should not opt for dividend re-investment option, because the every dividend re-invested gets locked in for 3 years in an ELSS. So a portion of your dividend gets locked-in for ever. If you have opted for dividend re-investment in an ELSS fund, you can switch to the dividend payout option. Some mutual funds also allow investors to switch from dividend re-investment to growth option.

For investors with risk appetite, Equity Linked Saving Schemes (ELSS) is one of the most popular investments allowed under Section 80C. Investors can avail triple benefits of tax savings, capital appreciation and tax free returns in ELSS. An ELSS is essentially a diversified equity fund with a lock in period of three years from the date of the investment. From a tax-ability of returns perspective, both capital gains and dividends from ELSS are tax free. Over a long time horizon equities give much higher returns compared to other asset classes. However, since ELSS funds are market linked investments, they are subject to market risk and volatilities. Historically, good ELSS funds have given excellent returns. In the last ten years ELSS funds on average have given more than 19% trailing annualized returns. The chart below shows average historical returns of the ELSS funds category.   

In the strict sense, it is not fair to compare PPF and ELSS. PPF is a risk free investment, whereas as ELSS is subject to market risks. For the sake of illustration we have shown the comparison of returns of Rs 50,000 annual investment in PPF and a good ELSS fund, over a long investment.

If you started an Rs 12,500 Monthly PPF deposit in 2011, your PPF corpus as on Apr1 2021 will be Rs 23.5 lacs, See the difference below

If you had started an Rs 150,000 annual investment in a top ELSS fund from 2010, see the difference. I have not taken for 15 years as Axis started its operations in end of 2009. Now you can imagine for 15 years

In Finance if we apply a rule of 72.. and even  considering avg return of 16% from ELSS and 9% from PPF then your investment is doubling every 4.5 years in ELSS and 8.5 years in PPF. 

Now conservative people have always doubt in mind that stock markets fall badly. Above data contains the 2 biggest falls in Indian stock market history i.e. of 2008 and 2011, even in 2015 stock indices were -ve.


Both PPF and ELSS have their merits and demerits. Your investment choice should be informed by your investment objectives and your risk tolerance level. Your risk tolerance level is based on several factors (discussed in our article Measuring Risk Tolerance of Investors). Age and financial situation are certainly two important factors that determine risk tolerance of an investor.

Conclusion

Both PPF and ELSS are wonderful tax saving investment options. However, their suitability depends on the financial objectives and the risk profiles of the individual investors. Investors should consult with financial planners or advisors to understand their individual risk profiles, and the most suitable tax saving investment options.

References:

1.  An article/Data from Sh Dwaipayan Bose on a mutual fund advisory site.

2. Data from https://stableinvestor.com/

3. Data from Advisory site

Disclaimer: The views echoed above are presented on the basis of available data. Investors should do their own analysis or take help of an advisory services before investing in any of the above depending upon their needs and risk adverseness. There are other avenues of tax saving in 80 C which are not discussed here, folks can refer to my other articles for the same..

Investment Planning part-1

Quote ARN -99994 for all Equity/Debt and ELLS mutual funds

EUIN - E120123

After reading my last posts lot of people are asking me about financial planning/Portfolio management and to write something about it. Honestly, this is a very huge topic/subject and needs lot of individual preferences. However I shall definitely write something on it to let people know about various instruments of investments, where to utilize your idle funds effectively to maximize your returns and bit of financial planning as well.

Before going to planning part that I want to cover in Part -II of the series , I would like to discuss the various types of instruments where we can park/invest our funds for long/short term. Insurance is most important part of our investment planning as it covers a huge amount of day 2 day life risk may it be medical, accidental or any unfortunate incidence where family looses it bread earner.  I have already written an article on "Insurance" if you have not read you can visit here .  You need to allocate some part of your savings in this. In case you are buying any endowment/money back policy then it is part of your debt investments also. If you are buying some ULIP then it is part of your balanced fund investments.

Now lets discuss the different kind of popular funds/Investments available in the market and the brief description.

1. Debt funds: Debt funds are the funds that invest your money in Corporate bonds, Govt. Securities, T-bills, Fixed deposits etc. They are safe as your money is safe and it is very remote chance that you will loose even some part of it . They provide returns based on current business environment  and current risk free rate of return in the market basically the bank FD's.   However, still the ROI depends upon the fund you are choosing and the ability of the fund manager.  They are better than FD's  as 1. They are more liquid 2. They are more tax savvy ( 10% on Long term cap gain  and 20% on short term gain)Debt funds can further be classified into subcategories
   
   
   • Liquid funds - A mutual fund that invests only in money markets such as commercial papers, commercial bills, and treasury bills certificate of deposit and other instruments specified by RBI.  These do not have any lock in period. Investor can buy/Sell them any time. Reliance MF has offered one facility to its investors by issuing an ATM card where investors can redeem their LF's thru ATM of HDFC bank. Similarly IDFC has offered services using SMS but with some banks only where you can buy/sell fund thru SMS. These funds usually offer 6-7%  returns. You can park your extra funds here like creating an emergency funds rather than in Savings account. Visit idfc mf or reliance mutual for more details. I am saying about these 2 only there is not much difference as far as returns are concerned while offer flexibility in your hands.
   
   
   • Short term debt funds: These invests in short term corporate debt papers, certificates of deposit (CDs), money market and government securities (GSecs- ST). They generally have 1- 3  months lock in period and exit load is 1% if you sell them before this period. They have also offered returns b/w 9-10% past 2 years, and are expected to offer the same in next 2 years. Some ST debt funds have 6-12 month exit load period as well. IDFC, SBI , ICICI Pru and HDFC all have some good short term debt funds. You can do an SIP also in these funds.
   
   
   • Ultra short term debt funds:  There is not much difference b/w Ultra short term fund and Short term funds with their investment strategies.They generally have upto 0-30 days lock in period and exit load is 1% if you sell them before this period.  In both these categories some funds have exit loads and some not. Axis, IDFC, UTI, Birla SL , ICICI Pru offer some good funds. Ultra short term funds offere better returns than liquid funds but only disadvantage may be the lock in period. These should be part of your emergency corpus.
   
   
   • Long term debt funds - These invest in long-term corporate debt papers, corporate bonds and government securities (G-Secs). for last  1 year when interest rates are high these are very good for safe investment in the volatile markets. They also offer better tax benefits than FD's ( about 10% -20%). Some good Long term funds are  SBI Dynamic Bond Fund, UTI Bond Fund, Principal Long term fund, ICICI All seasons bond fund etc. These have offered good returns past 2 years. But you need to time the market I expect them to give good returns over next couple of years as they have invested in the bonds yielding good returns and will be better when interest rates will soften. However you need to study before investing in any instrument. They are good for investment over 1-2 years as exit load is 1% on them if you offload before 1 year.
   
   You can do an SIP (Systematic investment plan : where you can invest money at specified intervals like Recurring deposit in the banks)in all the debt funds above like a bank RD.You can buy these funds thru your online broker like ICICI Direct , Share khan. but you need to check if they are charging you some fee as there is no entry load on MF's. Most of  the mutual offer online investing. Almost all MFs offer online investing. CAMS and Karvy have their apps/ Online Platforms too. This applies to all whether equity/Balanced/debt funds/ETF'S/Gold Funds.  Note: Contribution to debt funds is not included in your 80C exemptions. These are pure investments.
   
   
   • Endowment insurance Policies: Please read them in my article Know about Insurance
   
   
   • FD's/RD's : These offer steady returns in your banks, however they too have some lock in period else you loose your interest. Then you have to pay taxes on the earned income if you are eligible. However from next financial year bank interest up to 10k is exempted. Most of the people do not know about the FD's offered by corporates. Some good corporate houses like Mahindra finance,HDFC housing , L&T,LIC, DHFL, ShriRam transport offers better interests than Banks and are safe. However these are risky too. you need to make sure you are investing in a corp. with good rating.
   
   
   • PPF :  This is one of the best and beloved investments by salaried people as they offer 8-9% tax free returns. However the only drawback is the period of investment.
   
   
   • Govt/Corporate bonds : These are also good options if they offer good coupon amount. Most of the bonds have fixed maturity periods so your principal will be blocked for that time. Some govt bonds like NHAI, REC offer 8-9% coupon that is tax free, if you have spare amount and are tax free. These offer better investments than FD's. Some companies offer NCD( Non convertible debentures)  and offer good intereset on them. You need to check the company you are investing in. Like Tatas are as safe as bank. The only drawback on all these instruments are time limit before which you  can not withdraw.


2. Hybrid debt and Equity (Balanced) funds : Balanced funds are mixture of equity + Debt funds and they keep on switching between them according to the market conditions. Normally the balanced funds invest up to 65% in equities and 35% in the debt funds. For last few years some good debt funds have out performed the index and equity funds even.Few good funds are HDFC Hybrid, SBI Hybrid etc


3. Equity funds:As the name suggest these invest totally in equities/stocks of the corporates. These funds have 1% exit loads these days and no entry load. Most of the equity funds apart from Protection or ELSS are open endedi.e you can sell /buy them any time  though charges if any  will be applicable.These also come in multiple flavors as explained below:-
   
   
   • Thematic Funds: Fund managers of these funds invest in a particular sector funds so also called sectoral funds. Examples like FMCG. Pharma, IT, Auto, Banking, Power etc. I do not recommend them as your investment become totally dependent on that sector. However some FMCG funds have given good return even in the volatile markets e.g . SBI FMCG fund is one good fund.
   
   
   • ETF's: These are exchange traded funds. These funds have started few years back and they can be directly traded on exchange like shares rather than buying from MF house. You have to pay commission to your broker as you do in case of equity shares. They are not much in numbers but some famous ETF's are Gold ETF by benchmark,  Bank bees etc. you can check the list of these on NSE website
   
   
   • Multi-cap Equity funds and Focused funds: Multicap funds invest in all kind of stocks. Their portfolio consists of all small, mid and large cap from all sectors. Focused funds cant hold more than 35 stocks at one time and are multi-cap in nature
   
   
   • Large cap funds: As the name suggests they mainly invest in large cap blue chip companies like ITC, Reliance, Tata Steel, Tata Motors, HUL etc... 
   
   
   • Small and Mid Cap funds: As the name suggests they mainly invest in small and medium sized corporate houses stocks with a great potential. These fund rise/fall very fast, Over the years they have outperformed the large cap funds though. Some good funds in this category are    1. ICICI Pru discovery fund 2. SBI emerging business fund 3. HDFC mid cap opportunities 4. IDFC premier equity fund   and some more funds as well.
   
   
   • Index funds: These funds give you return on the basis how the index fares. These days apart from nifty index funds there are  thematic index funds like banking index funds, PowerIndex , Metal Index funds etc.
   
   
   • ELSS: These are Equity Linked saving Scheme funds. They are equity funds with a different mechanism. These are closed ended funds.They have a lock in period of 3 years and before that you are not allowed to sell these. Any amount invested in them has rebate under IT section 80C maximum limit is 1Lakh. If you want to do some equity investments and save tax then these are good option otherwise I do not recommend investing in them.
   There are few more Categories as per classification from SEBI but ultimately these fall under one or other debt/ Equity category or may be with mixture of both.
   You must have some investment in all Diversified/ Large Cap/Small and Mid cap funds with some percentage allocated as per your preference as part of your equity fund investment. I would suggest doing SIP in equity funds for long term to build some wealth with mix of both dividend and growth options. In both debt and equity funds there are 3 - option plans 1. Dividend (payout) 2. Dividend reinvest 3. Growth option. Dividends are not tax free from FY 20-21 so I do not recommend dividend options. The growth option give you a clear picture of how much a fund has grown over certain period of time.


4. Equities/Stocks: These are common stock of a company. Till you have a complete knowledge of the stocks better not to invest in them . Beware of the tips by some speculators. if you are getting advice from some trusted/ knowledge able person then you can take risk on your own. Better invest in MF's then.You need to have


5. Gold Funds:These are newbies in the Indian markets and in existence since last 2-3 years. Their value fluctuates with the gold prices in the commodity markets. These are best options than buying the physical gold if you want to invest in gold.
   
   
   • Gold ETF's:  Their value is generally derived from value of 1 gm of gold. These days its around 2850-2900. You can buy them from the stock exchange directly. these are trade able. Also called Paper Gold. You need not carry them with you as gold , they are in electronic form in your demat account and you can sell them from any part of world through online trading account or through broker.
   
   
   • Gold Mutual funds: These funds generally invests in Gold ETF's . People who does not have demat account can invest through Gold mutual funds. Otherwise better invest in ETF's if you have demat account to avoid extra charges levied by MF's.
   
   Note:  As stated above you can do an SIP in all the debt funds above like a bank RD.You can buy these funds thru your online broker like ICICI Direct , Share khan. but you need to check if they are charging you some fee as there is no entry load on MF's. Most of  the mutual offer online investing. I know ICICIPru, HDFC MF, IDFC mf, SBI, Relaince all offer online investing. This applies to all whether equity/Balanced/debt funds.   its better to check the performance of the fund over last  2-3 years and rating of the fund manager. you can check the websites of ValueResearch and Moneycontrol for more details.


6. NPS( National Pension Sheme): This scheme is started by govt. of India to help the employee class to build their retirement corpus. Govt. has also offered Tax benefits on this. If your employer take part in this then you can allocate max 10% of your basic salary through employer  and up to 50k can be deposited in your NPS account by you provided you are already have an NPS account (subscriber).  In NPS there are different fund managers as of now that includes ICICI , SBI, HDFC , LIC , UTI etc. Your funds are allocated in 4 categories 1. Equities 2. GSecs 3. Corp. Bonds and 4) Arbitrage.  You can opt for Auto choice where the fund manager will make the auto allocation or active choice where you have to opt yourself. However depending upon your age your exposure to equity is decided. More you get older exposure to equity decreases. NPS has 2 types of accounts
   
   
   • Tier-1 : You must have this account to be an NPS subscriber. This is your default account. You can not take amount out of this. This is for your retirement. You need to invest in this on monthly/quarterly basis like in your PF. Keep your allocation minimum as if you want to invest more then invest in Tier-2
   
   
   • Tier 2: You need to have a Tier 1 account before opening this. Operations are same as of Tier-1. The only difference is that you can put and with draw money out of it as per your wish. You can also transfer money from tier 2 t0 tier 1 acct. but not the vice-versa.

for more details visit NPS site

Some important points to take care before investing in MF's

• You must have to do your KYC (Online or with broker ) For more details see www.cvlindia.com/


• All MF's have some charges like Expense Ratio that they will charge to main the funds, Fees for the staff, entry loads, exit loads etc. Only entry and exit loads are mentioned in the prospectus.. Rest are hidden charges.


• People generally get confused whether to invest in NFO's(New fund offer) as they offer cheap NAV of Rs 10. Never go by NAV of any fund as the rise will always be on a %age basis. Also the old funds have trusted history and the fund managers, no body know how the new fund will fare. So never get tempted if someone offer you to invest in NFO as they offer high commissions to the agents to get the customers. Does not mean that all NFOs are bad but you need to a have detailed information which only best of advisers can provide but better avoid as they lead to fund explosion as well.
• Having proper asset allocation as per your risk profile is must so you must maintain that and take advice of a prudent adviser. Don't go blindly by web sites performance tracker without understanding the fund, its category, your investment horizon and your risk profile. Never recommend to invest in Equity for a shorter time horizon

Keep watching this space for more...

Friends, these  are my own views. I am not an expert in this part. My idea is just to make people aware of their day 2 day finance and help them taking their decisions . I always welcome your suggestions for more improvements and making this better. Even appreciation is welcome :)