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ELSS or PPF – which one would you prefer?

ELSS or PPF – which one would you prefer?

Sikha Pradhan a manger with a BPO wants to invest some money to save tax.  She has been investing in PPF for last few years but wants higher returns as she is concerned about inflation.  She has heard that Equity Linked Saving Scheme or ELSS is an excellent product to save tax but not sure if it is really worth the risk.  There are many like Sikha who have seen negative real return (Growth – inflation) over the last few years and want better returns from their investment. Understanding of both schemes will help you taking an informed decision.

Public Provident Fund

Public provident Fund or PPF as it is affectionately called is the go to investment options for the middle class to save tax and get guaranteed returns.  The tax free interest on PPF is a major draw for investors. With the recent changes announced in the union budget, one can now invest up toRs1, 50,000 in one financial year in this scheme. The only drawback is the long maturity period of 15 years.  Though loan is possible after completion of two financial years and partial withdrawals are allowed after completion of six years.  One also needs to keep in mind that interest rate of PPF has now been liked to 10 year government bond yield. It means returns are no longer guaranteed but will change with the prevailing interest environment on annual bases.  Considering that we are at the peak of the interest cycle the only direction it can move from here is down.

Equity Linked Savings Scheme

Equity linked savings scheme or ELSS lets you save tax and take exposure in equity market as well. Dividends earned as well as Capital appreciation is tax free in the hands of the investors.  In addition its lock in period of three years is lowest compared to any other tax saving instrument presently available. ELSS returns depend on the performance of underlying stocks and are not guaranteed. It is impacted by the same risks associate with equity markets.  As a result many are averse to investing in ELSS in spite of the benefit its offers.

Historical Returns

Below is a comparison of historical returns between PPF and ELSS.

PPF Historical Returns ELSS Historical Return

                                                                                                          Source: www.amfiindia.com

Although the returns in ELSS is not guaranteed as in the case of PPF however the returns has been far superior compared to PPF. So how does this difference in return impact the long term growth of your investment? For instance, if you had invested Rs 50 thousand every year for last 15 years starting 1st April, 1999 corpus would have grown to little over Rs.15 lakh in PPF compared to almost Rs.45 lakh in ELSS.  Your investment in PPF will be worth roughly one third the investment of ELSS for the same duration and investment. This is over and above the tax you will be saving depending on your tax bracket.

PPF v ELSS returnsAssumptions:

 Investment made in lump sum on 1st April every year,starting 1st April 1999 in both cases.

 Average return on ELSS is taken as 20.41% (10 year average as per CRISIL AMFI ELSS fund Index)

Although one may be apprehensive about investing in ELSS due to returns not being guaranteed but the historical returns clearly point to superior returns being generated compared to PPF. Considering the huge impact the difference it has in long term wealth creating, ELSS is a far superior option to save tax albeit with slightly higher short term risk.

About the Author

Pankaj Mathpal

Pankaj Mathpal, Founder and Managing Director, Optima Money Managers Pvt. Ltd. has over 22 years of work experience in Marketing, Financial Planning & Education. Read More…