PPF or ELSS ...Which one is good ?

PPF or ELSS…. Which one is good?

The best tax saving investment (80C): Should you invest in PPF or ELSS…………….

PPF does not give fixed returns

Though the Government changed the PPF interest rate from time to time, for a long period of time it had been fixed at 8%. Traditionally investors expected a yield of around 8% from their PPF deposits. However, from 2011 onwards, PPF interest rate has been made market linked and pegged with the 10 year Government bond yield. The chart below shows the historical PPF interest rates.

The benchmark 10 year government bond yield is at 8.8%, which is nearly at its 5 years historical high. Debt market experts consider 9% as the inflection point, since rates usually soften from this point. Interest rate in India has been high for a long period of time now and many experts believe that interest rates will start softening from next year. While a benign interest rate regime is good news for equity investors, since PPF interest rate is linked with the 10 year bond yield, we may see lower PPF interest rates in the future.

Mutual Fund ELSS as a tax saving Investment:

For investors with risk appetite, Equity Linked Saving Schemes (ELSS) is one of the most popular investments allowed under Section 80C. Investors can avail triple benefits of tax savings, capital appreciation and tax free returns in ELSS. An ELSS is essentially a diversified equity fund with a lock in period of three years from the date of the investment. From a taxability of returns perspective, both capital gains and dividends from ELSS are tax free. Over a long time horizon equities give much higher returns compared to other asset classes. However, since ELSS funds are market linked investments, they are subject to market risk and volatilities. Historically, good ELSS funds have given excellent returns. In the last ten years ELSS funds on average have given more than 19% trailing annualized returns. Find the below ELSS Scheme Performances:-

Scheme Name	NAV	1 Year Return	2 Year Return	3 Year Return	5 Year Return	Since Inception	AUM (Crore)
Axis LT Equity Fund	29.29	69.10%	40.37%	36.42%	23.95%	23.74%	3594.86
Reliance Tax Saver (ELSS) Fund	47.59	93.70%	38.94	37.85%	20.84%	18.22%	3796.37
Franklin India Tax Shield Fund	407.85	60.32%	29.20%	28.13%	17.54%	26.50%	1788.99
ICICI Pru Tax Plan	263.83	52.47%	27.83%	28.84%	16.31%	23.66%	2411.75
Canara Robeco Equity Tax Saver Fund	45.68	46.55%	23.65%	24.85%	15.52%	28.21%	871
DSP BR Tax Saver Fund	31.27	54.58%	27.83%	30.40%	15.20%	15.33%	1059.70
HDFC Long Term Advantage Fund	235.02	43.75%	23.59%	25.77%	14.85%	25.22%	1186.49

(All returns in above table in CAGR)
Comparison of PPF and ELSS returns

In the strict sense, it is not fair to compare PPF and ELSS. PPF is a risk free investment, whereas as ELSS is subject to market risks. For the sake of illustration we have shown the comparison of returns of Rs 50,000 annual investment in PPF and a good ELSS fund, over a long investment.

If you started an Rs 50,000 annual PPF deposit in 2002, your PPF corpus as on September 1 2014 will be Rs 11.4 lacs, with a cumulative investment of Rs 6.5 lacs.

If you had started an Rs 50,000 annual investment in a top ELSS fund like the ICICI Prudential Tax Plan in 2002, your corpus will be Rs 37.5 lacs.

Should you invest in PPF or ELSS:

Both PPF and ELSS have their merits and demerits. Your investment choice should be informed by your investment objectives and your risk tolerance level. Age and financial situation are certainly two important factors that determine risk tolerance of an investor.
Investors with high risk tolerance should invest in ELSS, while investors with low risk tolerance should invest in PPF. Over a long time frame wealth creation potential is much higher with ELSS, as we saw in the charts above.
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.

Conclusion:

Both PPF and ELSS are wonderful tax saving investment options. However, their suitability depends on the financial objectives and the risk profiles of the individual investors.

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