Which is the better of the two – ELSS or PPF?

Many investors feel confused about the kind of investment they need to make for wealth creation or tax savings purposes. Today we take a look at two such popular investment avenues and try to find out which is better.

1 – The Definition

Public Provident fund or PPF is a scheme run by Post office and backed by the Government of India. This backing makes PPF a very safe fund to invest in.
Equity Linked Saving Scheme or ELSS has been around for some 15 years now and focuses on investing in stocks/ shares of companies.

2 – The Returns Expected

PPF offers a stable rate of returns as per government declaration made once every year (between 7 and 8 percent).
ELSS returns vary wildly because of stock market fluctuations. However, on average ELSS yields around 14 percent if held for a long term.

3 – Historical Analysis of Returns

PPF rate of returns once touched 12% many years back. Then they slid down to 9%. Since the last 3-4 years, it has been around 7% to 8% mark.
ELSS rate of returns can be as high as 20% or as low as 8%. The returns totally depend on stock market performance and investor sentiments.

4 – The lock-in period

PPF has a lock-in period of 15 years. Partial withdrawals are possible after the end of the 5th year. ELSS has a lock-in period of 3 years.

The investment tenure

PPF cannot exceed 15 years of tenure. There is a possibility to extend PPF by another 5 years. There is no upper limit on ELSS tenure.

5 – The Tax Benefits

PPF is exempt from taxes at all 3 stages – during investment, during accumulation, and at time of withdrawal. (EEE, i.e. exempt, exempt exempt)

ELSS falls under Long term capital gains tax of 10% if the annual returns are above Rs. one lakh after a holding of 1 year.

6 – How much can be invested?

The PPF investor can invest between Rs. 500 and Rs. 1.5 lakh (either lumpsum or monthly instalments).
The ELSS investor can invest any amount. However, he/ she will get a maximum of Rs. 1.5 lakhs as tax exemption u/s 80C.

Example

To compare the performance of the two, let’s take an example for a period of 20 years (1999 – 2018).
If we invested Rs. 1.5 lakhs yearly (or Rs. 30 lakhs across 20 years), the returns on PPF was Rs. 77.8 lakhs, while ELSS would have yielded (whooping!) Rs. 2.3 crore. This way, ELSS was almost 3x of PPF over the long-term horizon. Though there will be post maturity taxation liability on ELSS (but not on PPF) the overall returns for ELSS will still be way higher than PPF.

The Bottom line

Both investment avenues have their own pros and cons. Our thoughts would be to check the volatility of the investment and then make a decision about which one to go for.
So, if you are a risk-averse investor who doesn’t want to lose the principal invested, then PPF is a safe option. But the returns will be lower than the ELSS.

On the other hand, if you need higher returns and are willing to be exposed to risk to market volatility, then ELSS will match your investment objectives.

To Summarize

a. PPF is a good option for those who don’t want the risks associated with volatile market performance. This safe investment provides assured (albeit lower returns and are in effect for longer than ELSS.

b. ELSS will provide better returns, but is highly volatile compared to PPF. This investment is riskier than PPF but will be best for those who are looking at aggressive wealth creation goals.

Do share your views, experiences and ask queries through comments.

Click on the link to whats app and get more details +91 9004789500