PPF vs ELSS: Beware of Faulty Comparisons!

Published: November 8, 2016 at 2:44 pm

Tax savings season is here! No, not for those who integrate tax-planning with goal-based investing and invest throughout the year. This is the season when millions of investors who are not interested in holistic money management, buy random products based on random advice at the last minute.

Much of this random advice stems from the media, online magazines and blogs that often carry a PPF vs ELSS or NPS vs ELSS comparison this time of year (post-Diwali to March).

For freefincal regulars, this is probably preaching to the choir. Most of you know that PPF vs ELSS is an apple vs orange comparison. Please do consider sharing this post with someone who might benefit using the sharing buttons on the left. There is still plenty of time left to identify goals, integrate tax planning and goal planning with a specific asset allocation in mind.

When two products are intrinsically different, there is no point comparing them.

  • PPF is a small savings scheme designed as long-term retirement savings product for those who do not receive a salary.
  • ELSS is an equity-linked tax saving product designed to promote retail equity participation.  ELSS funds have been repeatedly mis-bought as a better alternative to PPF.
  • PPF is a fixed income product and ELSS an equity product. The volatility associated with PPF rates is extremely small compared to that of ELSS.
  • The reward associated with ELSS can be higher or lower than PPF.

PPF vs ELSS is an apple vs orange comparison because they lie at different ends of the risk vs reward specturm.

 


Why use PPF when I can get more returns with ELSS?

Ah! This is where one needs to understand the importance of a diversified portfolio: 100% equity is as dangerous (if not more) than 100% fixed income. Investing should have a goal in mind and therefore a strategy. The strategy is to divide the investment among equity and fixed income instruments so that risk is reduced but returns are not sufficient (after tax) to meet out future needs.

Therefore, every portfolio requires both. fixed income and equity. The proportion depends on individual and goal. So I can save tax by using PPF as part of the fixed income component or ELSS as part of the equity component. They are both equivalent from that point of view. Btw, returns from ELSS are not guaranteed and can swing wildly.

Do I need PFF or ELSS for Tax saving?

If you can account for the 80C limit with your EPF, NPS, children’s education fees, home loan principal then you neither need PPF or ELSS. Read more: Making the best use of section 80C for tax saving: an example.

How do I choose between PPF and ELSS for saving tax?

Since the purpose is saving tax, you could either PPF or ELSS in the following way :

  1. Tag tax saving to your retirement goal
  2. Determine total amount necessary for building a retirement corpus including your EPF contribution.
  3. Decide on how much you will invest each month in equity towards retirement and how in fixed income. This is known as asset allocation.
  4. Suppose you wish to invest 40% in fixed income and 60% in equity, check if there is room under the 40% bin after deducting EPF contribution. If yes, you can use PPF for the rest. If some tax saving is possible, you can use ELSS under the 60% bin.
  5. If there is no room in the 40% bin, you can simply use ELSS alone.

An example is given here: Making the best use of section 80C for tax saving: an example.

PFF is a tax-free fixed income product. It always makes sense to use it if there is room to accomodate it in your asset allocation.

Apple by
Apple (PPF) by Joe King and Orange (ELSS) by Nate Steiner

Is is possible to lose money with ELSS?

Yes! Whether long term or short term or medium term, the answer is always yes.  ELSS funds can give just about any positive or negative return.

For example, Canara Robeco Tax Saver gave 171% return just before the dot-com bubble and -59.9% when the bubble burst (Source: VR fund page). So be ready for violent fluctuations. Sure the loss is not real if you do not redeem, but the fund value may be red when it is time to redeem!

If we do not understand equity as an asset class and do not know how to manage risk, we should either learn or stay away from ELSS.

This is as far as my thinking takes me now. If you have any more questions, do discuss them below.

Do share if you found this useful

We now publish both equity fund and debt fund (+ hybrid fund) screeners each month!
Use our Robo-advisory Excel Template for a start-to-finish financial plan! Now with a new demo video!  More than 415 investors and advisors use this!
Unlock the secrets of successful financial advisors and entrepreneurs with our new course!
My new book for kids: “Chinchu gets a superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both boy and girl version covers of Chinchu gets a superpower.
Most investor problems can be traced to a lack of informed decision making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, if we had to groom one ability in our children that is key not only to money management and investing but for any aspect of life, what would it be? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parent’s plan for it and teach him several key ideas of decision making and money management is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Did you know? We have more than 1000+ videos on YouTube to explore! Join our YouTube Community!

Join our courses in exclusive Facebook Groups!

  • 550+ members are now part of our new course: How to get people to pay for your skills! (watch 1st lecture for free). Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show how to achieve by showcasing your skills and building a community that trusts you and pays you!
  • Goal-based portfolio management! Join 2220+ members and get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free!  One-time payment of Rs. 3000 only. No recurring fees! Life-long access to videos (10+ hours content)  in an exclusive Facebook Group! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.

Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish mutual fund screeners and momentum, low volatility stock screeners .every month.
About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations based on money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements, write to pattu [at] freefincal [dot] com
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than one million readers a year (2.5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions, seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)
Free android apps