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Equity Linked Saving Scheme (ELSS) VS Public Provident Funds (PPFs)

ELSS : - The equity-linked saving scheme (ELSS) is a category of diversified mutual funds that the government created to encourage long-term equity investments in equity and equity oriented instruments. The broad aim of ELSS funds is to focus on generating investor wealth over the long term. ELSS qualifies for tax exemption under section 80C of income tax act and comes under EEE tax status. It has a low lock in period of 3 years and high growth potential as an equity based instrument.

PPF : – PPF is the tax saving instrument for the risk averse investor whose purpose is to mobilize small saving of individual by offering investments that carry reasonable return along with income tax benefits. PPF fully guaranteed by the government of India. It comes under EEE tax regime, i.e. contribution, interest and maturity amount all are tax free.

Which one to choose?

The answer is ELSS.

It is always important for investors to choose investments options based on your goal and investment horizon. Do not base them on the basis of market conditions.

Over a long time frame, wealth creation potential is much higher with ELSS. Young investors should opt for ELSS, since they usually have high risk tolerance and a sufficiently long time horizon to ride out the volatilities associated with equity investments.

Returns – ELSS is expected to offer better returns than PPF in long term. Currently, average 5 year compounded return for ELSS schemes is 20% pa and average 10 year compounded return for ELSS schemes is 14% pa. This is far better than PPF rate of return of more than 8%. 

As we can see the below chart, the last 5 years CAGR return in ELSS Scheme is 20%. If someone has put Rs 1,00,000 in  ELSS five years ago, his/her investment increase by Rs 1,48,832. On the other hand, if one go through PPF, his/her investment grew by only Rs 46,993.

Also, the return in PPF has declined over the years. From 9.5% at the start of 2013, it dropped down to 9.2%, then 9%, 8.7.1% and finally 8.10%. Between FY14 and FY17 the rate hovered between 8.1% and 8.7%. If you take the average inflation by year, the CPI from 2013 to 2017 has fluctuated between 7% and 9%. All in all, the PPF has not done an excellent job in consistently beating inflation over the last few years. You need some equity to create wealth.

Growth of Rs 1,00,000 - Comparison of Average Return in ELSS and PPF in last 5 years

 

 

Also, the return in PPF has declined over the years. From 9.5% at the start of 2013, it dropped down to 9.2%, then 9%, 8.7.1% and finally 8.10%. Between FY14 and FY17 the rate hovered between 8.1% and 8.7%. If you take the average inflation by year, the CPI from 2013 to 2017 has fluctuated between 7% and 9%. All in all, the PPF has not done an excellent job in consistently beating inflation over the last few years. You need some equity to create wealth.

Risks – Over longer term, volatility (price risk) reduces significantly, in equity instruments. There is little risk of capital in PPF, as it is backed by Central Government of India.

 

Comparison between ELSS Vs PPF

Features

ELSS

PPF

Type

Mutual Fund

Bank/Post Office Account

Lock-in/Maturity

3 years

15 years

Assumed Returns

Market Linked (17% for last 5 years)

Fixed (7.8% revised quarterly by Finance Ministry)

Minimum Investment

Rs 500

Rs 500

Maximum Investment Limit

No Limit

Rs 1.5 Lac

Taxation

Exempt

Exempt

Maximum Deduction Allowed under Section 80 C

Upto Rs 1.50 Lacs

Upto Rs 1.50 Lacs

Risk

Medium to High

Low

Tax on Maturity /Withdrawal/ Redemption?

No

No

 

Last Five Year Best Performing Debt Mutual Fund ELSS Scheme

% Return

ELSS Scheme

3mth

6mth

1yr

2yr

3yr

5yr

Reliance Tax Saver (ELSS) (G)  

6.90

13.00

35.70

20.60

11.00

21.60

SBI Tax Advantage Sr-2 (G) 

9.10

16.40

40.80

28.00

17.50

24.00

ICICI Pru RIGHT Fund (G) 

9.00

13.70

34.50

19.90

12.90

22.40

Reliance Tax Saver (ELSS) (G) 

6.90

13.00

35.70

20.60

11.00

21.60

Axis Long Term Equity Fund (G)

2.60

8.40

28.60

15.50

11.40

21.50

ABSL Tax Relief 96 (G) 

7.60

12.70

36.50

19.70

15.00

21.10

DSP-BRTax Saver Fund (G)  

1.90

7.40

26.70

20.10

13.70

19.40

 

  

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