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Choose between a PPF, a Mutual Fund, and a Bank FD!

three investment options

It is pretty obvious that everyone who falls under the category of taxable income would love to save tax. But wealth generation is also an important aspect so that we get to fulfil our goals. While balancing between the two, many people just end up settling between the two or fulfilling just one of these aspects. If this feels relatable to you, we are here bearing good news. You can now have tax-saving benefits and also work for wealth generation through certain investments. You can do so with the help of the Public Provident Fund (PPF), a fixed deposit or FD in a bank, and an ELSS or Equity Linked Savings Scheme that will let you invest and provide tax benefits at the same time. 

Related: All you need to know about PPF Account

Benefits of the three investment options - PPF, ELSS and Fixed Deposits

Due to the twin benefits of the three, it is only normal to be confused between the two. But do not worry. We have explained the specifics of PPF, Mutual Funds and FD in detail.

  • Safety and Risk - Bank Fixed Deposits are covered under DICGC for a sum of Rs. 5 lakhs per person. If you have deposit accounts in more than one bank, the amount would be applied for cover to each bank separately. However, this will be the case only if the bank is listed under the RBI’s scheduled banks list. PPF, however, is managed by the Government. The principal, as well as the interest, come with a sovereign-backed guarantee. ELSS funds tend to be exposed to the volatility of shares. But this risk can be alleviated by simply staying invested for the long term and investing through SIP in the ELSS.
  • Taxation - If you have invested in FD, just a TDS deduction is not the only tax you will be required to pay. Even the interest that you earned from the fixed deposit will be taxable. Thus, whatever interest you earn will be added to your annual income, and then you will be taxed accordingly. On the other hand, the maturity benefit and interest earned on the PPF are not taxable. Hence, post-tax returns on PPF are quite high. In the case of ELSS, your long-term capital gains (LTCG) up to Rs. 1 lakh per financial year would not be taxable. But if your gains exceed Rs. 1 lakh, then an LTCG tax of 10%would be applied to it.
  • Returns - For returns on PPF, the interest rates are fixed depending upon the yields of government bonds. The interest rate at the moment is 7.1% per year. Returns on ELSS, on the hand, depend upon how well the portfolio performs. The Five-Year Tax-Saver Bank FD interest rates offer a return of 5-7%.
  • Lock-In Period - PPF has a very long lock-in period of 15 years. When it comes to this, PPF has the biggest disadvantage since you would not be able to withdraw the amount before the end of the lock-in period, which is 15. Partial withdraws, however, are allowed but only at a specific liquidity level. ELSS has the shortest lock-in period of three years and offers high liquidity. But by remaining invested for a long time, your return could be higher. 
  • Tax Benefits - When it comes to tax benefits, PPF, Mutual Funds, and Tax saving Bank Fixed Deposits have the same tax benefits. You can avail of tax benefits to an amount of Rs. 1.5 lakhs in the financial year.

Related: FAQs about fixed deposits

What should you do?

Thus, now that you are aware of the basic differences between the three, you can make a well-informed decision on which fund to invest in. You should make a decision after considering all the factors, and an ideal portfolio should have a combination of the three investment options in proportions as decided by you or your financial advisor! 

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