It is important to note that ELSS Mutual Funds are equity instruments, while the PPF is a fixed income product.
As with all financial activities, it makes a lot of sense to integrate the task of tax planning with your overall financial goals and invest accordingly through the year. Section 80C of the Income Tax Act is popular among most salaried individuals, and many tax saving instruments fall under its purview.
Two such instruments are Equity Linked Savings Scheme (ELSS) Mutual Funds, and the Public Provident Fund (PPF). While they are vastly different products in terms of their mechanics, both help you save tax under the aforementioned section. These are the points to keep in mind before you decide to invest in one over the other.
The key factor to keep in mind is that ELSS Mutual Funds are equity instruments, while the PPF is a fixed income product. Since ELSS Funds are tied to the stock market, you cannot expect guaranteed returns and you should factor in your expectations from such an investment accordingly.
On the other hand, PPF can fulfil the debt component in your financial plan, and carry lesser risk in the process. Do note that the interest rates vary yearly throughout the tenure of your investment.
The major difference between these two instruments is the lock-in period contained within. While PPF needs you to be locked in for a minimum period of 15 years, ELSS Mutual Funds have a far more slender 3-year lock-in. Of course, both the corpus invested and the gains earned after the lock-in periods are exempt from any tax.
While it is prudent to invest in equity for a period of more than 3 years, the lock-in period does allow a degree of flexibility if you decide to tweak your financial plan in future.
Essentially, the choice between the PPF or ELSS Mutual Funds comes down to the asset allocation you have decided for your financial portfolio. Tilting the scales all the way to equity may be a risky proposition for many, and that is when fixed income and its associated instruments come in handy. If you are one of those investors and feel that PPF is such an instrument that can offer a degree of stability to your portfolio, you can proceed with the PPF.
If you already have allocated funds to debt instruments in your portfolio, ELSS Mutual Funds offer a smart equity option with a relatively short lock-in period. Both are exempt from tax under Section 80C as mentioned, and you are advised to calculate the amount you are eligible to invest every financial year after other deductions such as the EPF and plan accordingly.
BankBazaar.com is a leading online marketplace in India that helps consumers compare and apply for Credit Card, Personal Loan, Home Loan, Car Loan, and insurance.