Should I invest in PPF or ELSS?

Aug 27, 2020

Investors tend to make the grievous error of assuming that all investments that fall under Section 80C are similar and can be blindly compared – ELSS, PPF, NSC, 5-year bank deposits. This reveals all that is wrong with most individuals’ tax-planning strategy.

PPF and ELSS are not similar asset classes and must not be pitched against each other without taking the individual’s profile and overall portfolio into account.

The Public Provident Fund (PPF), is a sovereign-backed assured return product. Being a fixed-return investment backed by the central government, it stands for the highest safety.

On the other hand, the Equity Linked Savings Scheme (ELSS) is a mutual fund that invests in equity. This is a market-linked investment; such funds invest at least 65% of their assets in stocks of domestic companies.

PPF (debt product) cannot be an alternative or supplement to ELSS (diversified equity mutual fund) as both are intrinsically different.

So when faced with ELSS and PPF, you need to go back to your portfolio. The different asset classes in a portfolio must complement each other. To draw an analogy, the 64 black and white squares on a chessboard complement each other and give structure to the layout. Each occupies a different position and serves a purpose. A chess board must have both black and white squares.

Depending on a host of factors, you will have to arrive at your own equity:debt allocation. Within that, you will have to fine tune. For instance, if the equity portion of your portfolio is heavily skewed towards large-cap stocks and funds, then you need a multi-cap or mid-cap fund to supplement it. It cannot be supplemented by a debt holding.

ELSS is better suited to manage the risk of loss of capital and the erosion of purchasing power due to inflation. PPF provides complete safety and an assured return. But the decision on whether to opt for PPF or ELSS must be taken after viewing your entire asset allocation. If you are heavily tilted towards equity, PPF can be considered. If you have a debt-heavy portfolio, ELSS should fall within your purview.

Also keep in mind the time frame. PPF has a lock-in period of 15 years, as against 3 years for ELSS.

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