Mutual Fund vs PPF: Which is the Better Investment Instrument?

10 min read • Updated 8 January 2023
Written by Chandhana Padma
Mutual Fund vs PPF-Which Is the Better Investment Instrument

Investors can choose from a range of investment options that are available in the market. During this decision making process it is not unheard of to be confused about whether one should invest in the PPF in order to benefit from its relatively higher capital protection and tax benefits or invest in Market Linked Mutual Funds that could possibly provide relatively higher returns. This blog tries to help you deal with the stated dilemma better.

What is a Mutual Fund?

Mutual funds can be understood as an investment scheme managed by professional fund managers. A fund house gathers money from investors with  similar economic objectives and invests the mobilised capital in bonds, equities, money market instruments and other securities to generate risk adjusted returns. Then, it distributes the profits (or losses)n so generated amongst the investors after deducting a portion as pre-discussed expenses. These funds are referred to as “Mutual Funds” on account of the profits/losses being shared amongst investors.

A mutual fund unit carries Net Asset Value, commonly referred to as NAV which is basically the net value of all basket securities(constituents of the mutual fund) per unit of the fund.Investors can buy or redeem fund units at the prevailing NAV.

A mutual fund can be open-ended or close-ended, and its category largely depends on the investment objective, investment philosophy and underlying basket of securities.

Why Should You Invest in Mutual Funds?

The rationale behind investing in Mutual funds:

  • The  expertise of fund managers

People need relevant knowledge about industry sectors, companies, economic markets and cycles if they wish to invest directly in stocks and bonds. Investing in a mutual fund is an ideal investment alternative for individuals who wish to avail benefits of active portfolio management without investing their own time and efforts.

In a mutual fund, experienced professionals  evaluate  the market, shortlist desirable asset classes and select assets to generate maximum returns for investors. Asset Management Companies (AMC) have in-house or outsourced research teams to in-house or outsourced fund managers.

  • Imparts financial discipline

Investors can choose to invest in funds via the lump sum method  if they have the required quantum of funds. However, those who only have a limited amount to invest but desire to build a significantly larger corpus can decide  to invest via Systematic Investment Plans (SIP). An SIP empowers an investor to build a corpus of his/her desired size while bestowing a sense of financial discipline in the investor.

Usually, people become excited during bull market conditions and anxious during bear markets. SIPs to an extent help investors stay indifferent with respect to short term market fluctuations.

  • Benefit of Diversification

Mutual funds provide their investors with an array of diversification benefits with respect to tenure of investment, asset class, sector/industry, geography etc.

  • Carries transparency

According to SEBI’s mutual fund regulations, the NAV of mutual funds are to be updated at the end of every day. It’s a common practice for AMCs to publish factsheets every month. These sheets show the portfolios’ securities and their corresponding weights pertaining to a particular scheme. 

Additionally, these sheets contain the details of risk ratios and present the performance of the fund portfolio in comparison to a relevant benchmark. Such transparency enables investors to keep  track of the market value of their investments regularly. 

  • Tax benefits 

Investors of Equity Linked Savings Scheme (ELSS) are eligible for certain tax benefits. According to Section 80C of the Income Tax Act of 1961, investors of this scheme can claim tax deductions of up to ₹1.5 Lakh. People  in the higher tax bracket can save up to ₹46,350 per year by virtue of this. In addition to this, long-term capital gains (LTCG) on equity funds (investments that one holds for more than 1 year) are tax-free up to ₹1 Lakh.

Reasons to Avoid Investing in Mutual Funds

Given below are the disadvantages of mutual fund investments: 

  • Often the expense ratio, i.e. the fee charged by the mutual fund for fund management, is high. A high expense ratio decreases the investors’ net returns. 
  • While portfolio diversification mitigates risks, it may also lead to a dilution of profits.
  • Some mutual funds require investors to pay an exit load, i.e. the penalty fee for exiting a fund before a pre-set stipulated time. 
  • Suppose fund managers engage in portfolio churning, i.e. the constant buying and selling of stocks. there might be an increase in taxation and this in turn will lead to reduced returns. This is accounted for in the expense ratio and NAV.

What is a Public Provident Fund?

PPF, or Public Provident Fund, is a popular long-term savings and investment scheme backed by the Government of India. In 1968, the National Savings Institute of the Ministry of Finance launched this scheme to encourage citizens to grow their savings.

PPF is one of the safest investments, as   GoI  guarantees its repayment.  Furthermore, PPF offers tax exemptions on both the corpus at maturity and the stream of interest incomes. These benefits make it a preferred option for  long-term investment.

The minimum amount that one can invest in PPF is ₹500, while the maximum happens to be ₹1.5 Lakh per annum, in not more than 12 instalments. PPF investments have a lock-in period of 15 years. But, people can make partial withdrawals after 5 years from the date of opening the PPF account. 

Why Should You Invest in PPF? 

The rationale behind investing in PPF:

  • As PPF is a GoI-backed scheme, the investors receive guaranteed returns and repayment of principal. The probability of default is basically negligible and there is little to no risk of loss of capital.
  • It  is  one of the best investment options for people with a low-risk appetite. 
  • In addition, one can treat the PPF account as an ideal retirement planning tool, as it offers long-term capital appreciation and  tax benefits. 
  • PPF account holders are eligible for tax deductions up to ₹1.5 Lakh on the invested amount under Section 80C of the Income Tax Act. 
  • The EEE (Exempt-Exempt-Exempt) taxation model is applicable for PPF, one can get tax exemptions on the contribution, accruals and withdrawals of PPF investments.

Reasons to Avoid Investing in PPF

Listed below are the reasons to avoid PPF investments:

  • 15 years is a very long lock-in period. In addition, people may find it easier  to meet their financial needs if they can  withdraw the required funds prior to the long maturity.
  • As mentioned above, there is a limit to the amount you can invest. Investors are prohibited from investing more than 1.5Lakh in the scheme.  
  • Unlike mutual funds, there is no provision to redeem fund units during the course of investment.
  • Interest is earned on deposited value as on the 5th or the last day of a particular month – the lower of the two is considered. So, for example, if your account holds ₹25,000, and you deposit ₹10,000 on the sixth day of the month, the interest will be calculated only on ₹25,000 and not on ₹35,000. 
  • The rate of interest of PPF is subject to change. It is not fixed and can decline with a fall in broad market interest rates, which is a major disadvantage. 

Mutual Fund vs PPF: A Comparative Analysis

The table below compares the key factors related to these two investment options: 

Key Parameters Mutual FundsPPF 
Who runs it?Asset Management CompaniesGovernment of India 
Returns on Investment Depends on the performance of the fund portfolio constituentsReturns are computed annually. The current interest rate is 7.1% 
Lock-in Period 3-year lock-in period (applicable only for ELSS), usually there is no set lock in period if  not mentioned otherwiseLock-in period of 15 years that can be extended into blocks of 5 years
Tax Benefits Depends on the holding period and type of mutual fund ₹1.5 Lakh is available for deduction under section 80C of Income Tax Act. Moreover, they enjoy the EEE tax status, which makes them a completely tax free investment
LiquidityLiquidity is on the higher endLiquidity is on the lower end
DiversificationThere is scope for incorporating medium to high degree of diversification.No such option available here
Risk Riskier than PPF because investments are subject to market risks. But, portfolio diversification and investing via SIP help lower the associated risks.PPF does not carry any risk as it is backed by the Government of India.

Things To Consider Before Investing

Listed below are important things for you to keep in mind when choosing between mutual funds and PPF

  • Remember to evaluate your risk tolerance level before you decide to make any investment. Estimating how much risk you can assume for your invested capital is advisable. Defining risk is the back-bone of any investment related decision making. 
  • Formulating a financial goal will help you make more informed investment decisions. First, select a goal, for example, children’s education, retirement or buying a second home. Then, choose an investment that  aligns with your financial objectives. 
  • While making an investment decision, you must  consider whether or not you have to liquidate those investments for unforeseen financial circumstances in the future. Mutual fund units offer high liquidity, while PPF has lower liquidity. Additionally, it is prudent to consider the appreciation value of the investment for the long-term. 
  • It would help if you consider the volatility factor. It is commonly known as the extent to which the price of an asset can fluctuate.Volatility is inherent to  the investor’s risk appetite. While mutual funds are subject to market risks, PPFs offer steady interest income. 


It is not easy to favour any side in the debate related to mutual funds vs PPF. Both these options have various benefits. Instead  of searching for which one is better, try to understand which one is more suitable for your unique financial needs. 

First, analyse your risk profile and set up investment goals. If you are  unwilling to take  risks, PPF may be a suitable investment option. On the other hand, you can choose mutual funds if you want to make more profits over a longer period and are willing to assume more risk.

Frequently Asked Questions (FAQs)

Is there anything better than PPF?

PPF is a good option for risk-averse investors. However, mutual fund investment is better for people willing to take risks. Besides PPF, there are  several  low-risk investment options like bank fixed deposits, NPS (National Pension Scheme), government bonds, etc.

Which is more liquid—PPF or ELSS?

PPF has a long lock-in period of 15 years. One can only make partial withdrawals, that too only after 5 years. Comparatively, ELSS funds carry more liquidity. One can redeem their  ELSS investment either partially or fully after the 3-year lock-in period.

Who should invest in mutual funds via SIP?

People with a regular income source, such as salaried individuals, can invest in mutual funds via SIP. In addition, people who have formulated long-term financial plans like marriage, higher education for children and retirement can choose to invest via SIP.

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Chandhana Padma

Investment Associate
Chandhana is a budding investment professional with growing expertise in the capital markets. She has completed her Bachelors in Business Administration with a specialisation in Finance from Christ (deemed to be) University,Bangalore. She is also a CFA L2 candidate. She is currently working as an Investment Associate at Wint Wealth.

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