ELSS and PPF are the two most popular tax saving investment. Both have many benefits. Financial advisors widely recommend ELSS and PPF. You may be wondering which one should be the best tax saving investment for you. ELSS or PPF, which can give better returns in the long term? ELSS vs PPF, which is less risky? ELSS or PPF, which is more flexible? In this article I will give answers to these questions. I will test both of the tax saving investment on different parameters.
ELSS or PPF: Which is Less Risky?
The risk of an investment depends upon the instrument where the money is put. ELSS and PPF have totally different investment objective. Therefore, risk varies between them.
ELSS invests your money in the shares. Shares can swing with the market sentiment. Hence, ELSS is very risky. It can even reduce your capital.
PPF invests in government bonds. These bonds are backed by the Government of India. The government securities are considered the most secure investment. Your investment is as much risk as the risk of government default. It is very unlikely.
Also Read: Top 5 least Risky ELSS
The Return Comparison of ELSS and PPF
ELSS and PPF work on different investment objective. ELSS invests in shares to maximize the return, whereas PPF investment in government bonds which don’t give more than the bank fixed deposit.
The equity can give the best return in the long term. The historical data have proven this. But actual average return for you depends upon the entry and exit time. If you invest at the time of market low, and redeems the units at the time of market peak, you can make enviable wealth. Whereas, if you invest in market rally and comes out after the big market fall, you can lose a big part of your capital.
The interest rate of PPF is fixed for every year. Now it is based upon the 10 year government bond yield. The interest rate of PPF is similar to 5-10 year bank FD.
To get a fair idea of ELSS and PPF return you should see the historical return of both the investment. In the following table you can see the wild fluctuation of ELSS. While PPF gave a constant return.
But on average ELSS gave 100% more return than the PPF. The CAGR of last 10 years of PPF was mere 8.2%, but ELSS could give CAGR of 17%. The ELSS return mentioned, is the category average. Indeed, the top ELSS Fund has given superior return. Axis long term equity fund has given 25% annualized return during last 5 years.
If you have invested one lakh rupees in PPF and ELSS at the same time 10 years back, The PPF would have bee, 2.20 lakh at the end of 2014. Whereas the ELSS would have been 4.81 lakh.
ELSS Vs PPF: Return Comparison
Tax Benefit Of ELSS Vs PPF
ELSS and PPF both are the most tax efficient investment. Under section 80C, the investment in ELSS and PPF give you a full tax deduction. The tax deduction for these investments is of EEE category. EEE stands for Exempt, exempt, and Exempt. It means there is tax exemption in the investment. The interest earning is tax free. The maturity amount also does not attract any tax. Note under 80C, You can’t invest more than Rs 1.5 lakh in a financial year.
Read in Detail: ELSS Tax Benefit and Comparison With Tax Saving investments
Redemption Time Limit
All the investments which give you tax benefit come with some limitation. The most notable condition is the lock in period. The ELSS and PPF both lock our money for the certain period.
A PPF account is for minimum 15 years. You get the maturity amount after the completion of 15 financial years. However, you can take loan against PPF. You can also withdraw some amount from the PPF account after 5 full financial years.
The ELSS is more flexible in this regard. ELSS has the lock in period of only 3 years. Note, equity investment gives you the best return in the long period.
You can invest minimum Rs 500 in both ELSS and PPF. However In a PPF account, you can’t invest more than Rs 1.5 lakh in a year. There is no such restriction in ELSS.
Also, In a PPF account, you must invest minimum Rs 500 per year. ELSS doesn’t have such limitation.
Should You Invest In ELSS or PPF
ELSS has many benefits as well as disadvantage. Similarly PPF has its positives and negatives. ELSS may be the best tax saving option for a set of people. While PPF can be also the best tax saving option for another set of people.
ELSS is Good For
ELSS is best suited the for the person who has the following attributes.
- Can take big risks
- Can invest for several years
- Understands the share market
- Retirement is several years far
PPF is Good For
PPF is suitable for the person who has the following attributes.
- Can’t take risks, wants maximum security.
- Can wait for 15 long years
- Can invest regularly.
- Near to the retirement
Are you still undecided between ELSS vs PPF? You can also choose the middle path. Put a big part of your investment in PPF. It will give the stability to your portfolio. The PPF interest rate will always remain competitive. This will make a retirement corpus for you.
Invest smaller part into the Equity linked saving scheme. This investment will give you the opportunity of share market return. You would be able to build wealth from this investment.
It was the ELSS vs PPF comparison by me. Do you want to share your experience about the PPF and ELSS? Please write in the comments section.