ELSS Vs PPF: Which Is Better Investment?

Equity Linked Savings Scheme (ELSS) and Public Provident Fund (PPF) are both excellent tax-saving investments. PPF has been a favorite for conservative investors. However, if you are young and have a slightly higher risk tolerance, you can invest in ELSS. ELSS funds invest in equity markets and thus hold the potential to deliver higher returns. By investing in mutual funds you can indirectly participate in the capital markets and benefit from the growth in the economy. 

The present rate of inflation is around 6% p.a. Hence it is important to generate returns that can not only beat the inflation but also help the capital to grow. Given the limitations of traditional investments in delivering higher returns, ELSS is fast becoming popular even among conservative investors. Over the long term, almost all funds have delivered better returns than what PPF currently returns. More than half the category has delivered 3, 5, 7, 10-year returns in double digits. 

The lock-in period of PPF is 15 years, whereas it is 3 years for ELSS. Thus, in case of a financial emergency one can easily withdraw money after the lock-in period of three years. 

How much to invest depends upon the risk appetite of the investor. If you are able to save up to Rs 6 lakhs a year for long-term goals, you can invest Rs 1.5 Lakh in PPF and 4.5 L indirect equity through ELSS. But for someone who saves-invests Rs 1 Lakh per year for the Long term, it is better to choose ELSS over PPF. 

Many invest in PPF for tax benefits. Even ELSS offers tax benefits under Section 80C of The Income Tax Act. But tax-saving should be considered as a secondary benefit. Ideally one must choose the product type that makes sense to their financial plan, and then consider tax saving options in that. Investments in tax-saving instruments should be done with the aim of long-term wealth creation. If an individual invests Rs.12500 every month in ELSS funds for 15 years then his investments would grow to Rs. 61 lakhs as compared to Rs.29 lakhs in PPF.


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