ELSS or PPF? Should You Cash-in on Past Data?

ELSS funds invest in equities and are eligible for a deduction of taxable income as part of the various options available under the Section 80C limit.

Typically, the returns of equities are higher than those of fixed-income options such as PPF or EPF.

This leaves investors with two thoughts about whether they should choose the volatile ELSS or the stable PPF/PF for their investment.

However, the answer is way beyond this number game, which we’ll answer later in this article. But let's first look at how investing ₹1,50,000 each year on April 1st of each financial year would’ve yielded in PPF versus each category of ELSS funds.

Corpus After An Investment of ₹1.5 Lakhs in PPF Each Year For The Last 15 Years:

Corpus After An Investment of ₹1.5 Lakhs in Each ELSS Fund Each Year For The Last 15 Years:

It can make sense when you are already not significantly exposed to equity and are not contributing significant sums of your regular income in equity.

An investor must diversify their investments across products after consulting their qualified financial advisors.

There would be hardly any genuine, qualified financial advisor who would recommend you always keep more than 90% of your sums in equity and allocate nothing to debt. Asset allocation is quite critical when it comes to money management.

After allocating sums to the Employee Provident Fund (since its yields are higher than PPF), one may consider allocating sums to PPF for their debt allocation as 7.1% p.a. returns, albeit fluctuating, are tax-free. To compare it with a debt fund or a corporate bond would be wrong, as the latter come with some sort of credit risk and fluctuate based on interest rate fluctuations.

Even though PPF is way more safe than the latter, on a pre-tax basis (assuming a 30% slab rate for investors), the yields of PPF should be compared with bonds yielding 10.35% p.a., that too without considering the aforementioned risks. Unfortunately, bonds/debt funds yielding that much come with a lot more risk than PPF, as the capital recovery also gets questioned.

Moreover, an investor may, most likely, not withdraw sums from their PPF account during the 15-year tenure due to their stringent lock-in conditions.

However, the same may not be the case with ELSS funds, as they are redeemable after a lock-in of 3 years only.

An investor may, therefore, feel jittery and withdraw sums in between the 15-year period and withdraw sums and not invest sums on April 1 each year

We haven’t really seen the strongest of bear markets. Markets remained flat for almost 12 years, from the highs of 1992 until 2004. Similarly, these past returns may not repeat if India or the entire world gets to face some prolonged uncertain circumstances.

Hence, it is always prudent to allocate sums to various asset classes after considering each person’s personal risk profile and goals.