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Debt Funds vs. PPF: Which One Should I Invest? Research Team | Posted On Tuesday, December 31,2019, 04:03 PM

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Debt Funds vs. PPF: Which One Should I Invest?



What are Debt Funds?

Debts funds are known to invest in fixed income-generating securities like corporate bonds, Treasury bills, commercial papers, and money market instruments. Investors mainly invest in debt funds to earn an interest in income and appreciate their invested money.

The issuer pre-determines the interest the investor will be paid on maturity. Thus they are known as fixed-income securities. Debt funds aim to give steady returns to investors throughout the investment horizon. Thus investors are required to choose the investment tenure in line with the fund.

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Now depending on the investment horizon you can go for various options namely liquid funds, short-term or ultra short-term funds, dynamic bond funds, debt hybrid funds, and income funds.

What is PPF?

The Public Provident Fund was launched in India in the year 1948. The scheme is popular among the majority of investors due to the tax benefits it offers. The main objective of the scheme is to mobilize small savings into investments. The scheme enables investors to get capital appreciation through interest payment and compounding of the principal amount. Investors can build a considerable corpus by investing in this scheme and achieve milestones like retirement planning, saving for a child’s education or marriage, etc.

See Also: Why PPF is a Great Investment?

Debt Funds vs PPF: Which one should I Invest?

Let’s look into some of the important aspects of both debt funds and PPF that will help you identify the correct investment option:

-Interest Rates:

Deb fund offer usually offers returns in the range of 7% to 9% which is higher when compared to most of the traditional investment schemes. On the other hand, the interest rate offered on PPF investments are subjected to quarterly revision and the current interest rate stands at 7.9% (applicable from 1st Oct 19).

-Security of Investment:

PPF is a long-term investment scheme backed by the central government. Thus you can open a PPF account at any post-office nearby. Your investment is completely secure as PPF investments contain sovereign guarantees and are low-risk products.

On the other hand, you need to take the mutual fund route to invest in debt funds. Debt funds are known to suffer from credit risk and interest rate risk which makes them riskier options when compared to PPF. Credit risk poses the risk of default whereas an increase in the interest rate may lead to a fall in the prices of bonds.

See Also: How To Open PPF Account Online?

-Risk Ratio:

When compared to equity funds both debt funds and PPF are low-risk products. However, if you compare debt funds and PPF side by side then we can conclude that debt mutual funds are riskier than PPF. Let’s try to understand why:

The fund manager of debt funds will invest in a range of securities according to the duration of your investment. Now as we know debt securities are traded, so the NAV of the scheme is subjected to changes. Due to the fluctuation, there are no fixed returns in debt funds. This is the reason many traditional investors go for PPF investment.

-Return on Investment:

Due to the fluctuations of the NAV, debt funds have the potential to do better and offer good returns. To enhance the performance of the debt funds fund managers often subscribe to a better mix of products, manages credit risk, encash opportunities and make gains from the changing interest rate cycles. This is the reason the schemes are able to generate good returns. However, your investments are liable to be taxed under LTCG or STCG as per your investment horizon, thus reducing your returns by a considerable margin.

On the other hand, PPF investments are known to offer decent returns. However, the maximum amount that can be invested in a year is capped. Since PPF investment belongs to the EEE category, it gives you a maximum tax benefit, unlike any other investment instruments. So even if you invest Rs. 1.5 Lakh a year, you are able to fetch maximum returns due to the tax benefits offered by PPF.

See Also: How PPF Rules Affect your Investments?

Which Investments are Great?

Both debt funds and PPF investment are ideal for risk-averse investors. While debt funds try to maximize the investment returns by diversifying across various types of debt securities, PPF aims to generate safe returns through interest income and compounding of the principal. The diversification allows debt fund to earn good returns. Though there are no guaranteed returns, it usually falls within a predictable range. These investments are suitable for investors who invest in both short and medium investments horizon.

However, the PPF scheme is ideal for investors who want to create a corpus while staying invested for a longer investment horizon. The scheme is best suited for traditional investors who want an appreciation of capital at low-risk.  But PPF does not offer liquidity unlike debt funds and the investments are locked-in for 15 years.

See Also: What To Do If You Have Two PPF Accounts?

Thus when it comes to deciding between the two options you must consider your two factors as primary indicators – liquidity and investment horizon. As an investor, if your aim is to establish a regular income stream or invest for small time periods then debt fund can be your ideal choice. However, if you are in a search of long-term investment schemes which can give you decent returns then you must opt for PPF scheme.

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