SIP Vs PPF- Which is better for the long term?

Are you a bit confused between SIP and PPF to choose for your long-term investment goals? The dilemma is natural as both these investment vehicles are great options for long-term investment goals. However, both are suitable for different types of investors and specific investment goals. So, let’s dive deeper into these two and understand which is more suitable for you.
Understanding Systematic Investment Plan
As you all know SIP is a process of investing regularly in mutual funds and you can start with a nominal amount for instance ₹ 500 or so and every month on a specific date you make the investments or you can automate them to be deducted from your registered bank account. SIPs are known for building investment discipline and wealth creation over time.
The key features of SIPs include –
- Returns are linked to the market: Mutual funds invest in the market both equity and debt and thus the returns are influenced by the market movement/ performance and usually offer higher returns than traditional saving and investment options. Having said that, the market risk is also there which is reflected in the volatility of the market, and thus returns are subjected to the market risk. In the long usually, the returns are more stable compared to the short term however, that depends on the type of funds you are choosing for your SIPs. In short, investing via SIPs of mutual funds, you can enjoy the market-linked returns while considering the market risk.
- Liquidity: SIPs offer a fair amount of liquidity and one can redeem their investments and get the fund in their bank account within a week, however, it again depends on the type of the fund. Usually, the funds, which offer tax benefits, have lock-in periods, otherwise, you can redeem your funds anytime subjected to exit load according to investment tenure.
- Flexibility: With SIPs, you can enjoy supreme flexibility in investments. You can invest in the market without any financial constraints as you can invest in SIPs with just ₹ 500 and in some cases even with ₹ 100 per month. You can increase your SIPs and even decrease them according to your financial position, and investment goals, you can choose the investment tenure according to your investment goals.
- Power of compounding and Rupee cost averaging: When it comes to SIPs, these two factors play the most important role. As you can invest in smaller proportions, you can start early, and with the magic of the power of compounding, your tiny investments can reap great returns in the long term. On the other hand, with the rupee cost-averaging factor, you do not have to wait for the market to get slow, or prices to go down. Usually, the investment value averages out in the long term, which again helps in generating higher returns.
- Tax liabilities: Capital gain taxes are levied on returns generated from mutual fund SIPs. On the other hand, you can enjoy tax deductions under section 80C up to ₹ 1.5 lakh on returns generated from ELSS funds.
Understanding Public Provident Fund
PPF is a government scheme for savings and investments, which is also long-term and offers guaranteed returns. The key features are here –
- Guaranteed, risk-free returns: PPF offers a fixed return via interest income. As this is a government scheme, that is not linked to the market, the risk quotient is nil. The interest rate is fixed and thus the return is also fixed.
- Investment tenure: If you are investing in PPF then you have to stay invested for at least 15 years. While this reinforces savings discipline, it lacks flexibility and liquidity.
- Partial withdrawal: One can partially withdraw from a PPF account only after the 7th year of investment. This again makes the investment less liquid and flexible.
- Tax relief: First, you can avail of tax exemption up to ₹ 1.5 lakh under section 80C for investing in PPF. On top of that, the interest you earn from the PPF investment is tax-free.
Which one to choose for long-term investment planning: SIP or PPF
Now you have a fair idea of both the investment options, and thus you can understand both the options are good for long-term investments, and it is your investment goals, and risk appetite that can decide the most suitable options for you.
Risk appetite
SIP is suitable: If you are not risk-averse and ready to take calculated risks to earn better returns.
PPF is suitable: If you are risk averse and want to have a stable return
Investment goals
SIP is suitable: If you are looking for wealth creation over the long term
PPF is suitable: If you are looking for regular income and to keep your capital safe.
Flexibility and liquidity
SIP is suitable: If you are looking for flexible investment tenure and higher liquidity in your investment
PPF is suitable: If you are looking for a fixed investment amount, and ready to stay invested for 15 years at a stretch.
Wrapping up
So, while both SIP and PPF are suitable for long-term investments, the former serves the purpose of wealth creation, while the latter serves the purpose of stable return and safety of capital. The investment goals, risk appetite, and other factors mentioned above need to be considered which one is more suitable for you.
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