PPF Vs ELSS — Which One Builds A Bigger Retirement Corpus?

Retirement planning requires a long-term investment strategy, selection of appropriate assets and consistency. An extended horizon with smart selection of investment instruments can help you in building a sizeable retirement corpus. In India, when it comes to retirement planning, investors often prefer investment options like the Public Provident Fund (PPF) and Equity Linked Savings Scheme (ELSS).

Both instruments, often recommended by financial advisors for long-term wealth creation, offer tax benefits. However, they come with varying levels of risk, returns and investment tenure. Before selecting any of these tools for retirement planning, a thorough assessment of risk-reward scenarios could be a prudent step for a financially secure future.     

Equity Linked Savings Scheme (ELSS) is a market-linked mutual fund instrument that offers potentially higher returns, whereas PPF is a government-backed long-term savings scheme known for security. Both PPF and ELSS offer tax benefits. Conservative investors often prefer PPF due to its steady returns, while ELSS is mostly preferred by investors looking for market-linked returns. Let’s take a look at basic factors associated with these two investment instruments.

Tenure and lock-in period: The PPF scheme comes with a lock-in period of 15 years. On the other hand, ELSS comes with a lock-in period of three years. After the lock-in period, there is no maximum tenure for ELSS investments, while the PPF investments mature after 15 years. The PPF investments can be extended in blocks of five years each.

Risks: PPF is seen as a secure investment option, while ELSS comes with moderate risk due to its exposure to stock markets.    

Returns: The central government reviews and fixes the interest rate for the PPF scheme on a quarterly basis. Currently, the PPF interest rate stands at 7.1% per annum. On the other hand, ELSS investments have generated average annual returns of 12-18% over a long-term horizon, as per past trends, with many schemes offering steady returns of 15% per annum.    

Liquidity: In terms of liquidity, ELSS offers more flexibility due to a shorter lock-in period. Partial withdrawals are allowed after the expiry of five years from the account opening year. On the other hand, partial withdrawals from PPF accounts are allowed under certain circumstances.

PPF

• Yearly investment: Rs 1.5 lakh

• Expected rate of return: 7.1% per annum

• Tenure: 15 years

• Total investment: Rs 22.5 lakh

• Estimated Returns: Rs 18.18 lakh

• Maturity Amount: Rs 40.68 lakh

ELSS

• Monthly investment: Rs 12,500 (Rs 1.5 lakh per annum)

• Expected rate of return: 15% per annum

• Tenure: 15 years

• Total investment: Rs 22.5 lakh

• Estimated Returns: Rs 62.11 lakh

• Maturity Amount: Rs 84.6 lakh

As seen from the above calculations, an investment of Rs 1.5 lakh per annum in PPF helps to build a corpus of Rs 40.68 lakh in 15 years. On the other hand, ELSS offers much higher returns over the same tenure. A monthly investment of Rs 12,500 (Rs 1.5 lakh per annum) in ELSS can grow into Rs 84.6 lakh at an assumed interest rate of 15% per annum.

Both ELSS and PPF come with tax benefits, but they vary widely in terms of expected returns, risks and investment horizon. Choosing between the two investment instruments should be based on your risk appetite, tenure and the amount you want to invest. Being a government-backed scheme, PPF could be a suitable choice for investors eyeing secure returns over a long-term horizon of 15 years. On the other hand, investors aiming for market-linked returns with moderate risk may opt for ELSS to build a retirement corpus.  

To conclude, a diversified approach using both PPF and ELSS could be a suitable strategy to balance steady returns with growth. As both the instruments vary widely in features, risks and returns, it’s advisable to assess your risk appetite and investment goals before investing.