ELSS vs. PPF: Which is more efficient for reaching your Rs. 5 crore target?

Equity Linked Savings Schemes (ELSS) and Public Provident Fund (PPF) are popular tax saving investment avenues under Section 80C with different risk-return profiles.  Read on to find out more about each and understand how they can help you reach your dream goal.

How ELSS works as a tax saver?

Equity Linked Savings Schemes invest at least 65% in equities while enjoying tax benefits under Section 80C up to Rs. 1.5 lakhs. These open-ended funds come with a 3-year lock-in period. ELSS scores over PPF with the potential for higher returns of 12-15% over the long term.

Benefits of investing in PPF 

The Public Provident Fund offers fixed returns of 7-8% backed by government guarantee. The maximum investment allowed is Rs. 1.5 lakhs per year. PPF comes with a 15-year tenure with provision for extensions. Principal and returns are tax free.

Comparing expected returns

ELSS funds can deliver inflation-beating returns of 10-12% over the long run compared to 7-8% fixed returns from PPF. However, PPF returns are fixed while ELSS returns may be volatile given full equity exposure. Your risk appetite will determine which option is preferable.

Tax efficiency comparison

The interest earned on PPF is completely tax free. For ELSS, 10% LTCG tax applies if gains exceed Rs. 1 lakh in a year. However, ELSS enjoys the benefit of indexation which reduces tax liability on long-term capital gains.

Liquidity comparison

PPF wins hands down in terms of liquidity. Premature withdrawals are allowed from 7th year onwards. ELSS has a lock-in of 3 years so funds cannot be accessed during that time. However, ELSS scores better in terms of flexibility after the lock-in period ends.

Saving regularly through sip investments

The disciplined approach for either option is to save regularly through SIPs or fixed monthly deposits. Investing Rs. 12,500 per month in ELSS or PPF will lead to annual tax savings of Rs. 1.5 lakhs under Section 80C.

Analyzing corpus projections

With monthly investments of Rs. 12,500 over 20 years, the principal for both options totals Rs. 30 lakhs. Assuming PPF earns 8% annually, the maturity corpus is approximately Rs. 74 lakhs. If ELSS earns 12% over 20 years, the corpus can grow to Rs. 1.26 crores.

Managing risks in elss investing

Equity exposure makes ELSS mutual funds volatile in the short term. Hence, stagger your SIPs over 6-12 months. Do not redeem ELSS when markets decline; instead continue SIPs to benefit from lower NAVs. Maintain 2-3 year emergency funds in debt funds and FDs to avoid liquidating ELSS during market downturns.

Striking the right balance

Consider investing 60-70% of your Section 80C limit in ELSS mutual funds for long-term growth while allocating 30-40% to PPF for stability and liquidity. This balanced approach allows you to optimize returns while managing risks on the path to your Rs. 5 crore target.

Combine the high return potential of ELSS with the safety of PPF. Continue investing through ups and downs in the market to create long-term wealth. Consult a financial advisor to determine the ideal mix for your risk profile.