Both PPF and ELSS have their merits and demerits. Your investment choice should be informed by your investment objectives and your risk tolerance level. Your risk tolerance level is based on several factors (discussed in our article Measuring Risk Tolerance of Investors). Age and financial situation are certainly two important factors that determine risk tolerance of an investor.
- Investors with high risk tolerance should invest in ELSS, while investors with low risk tolerance should invest in PPF. Over a long time frame wealth creation potential is much higher with ELSS, as we saw in the charts above.
- Young investors should opt for ELSS, since they usually have high risk tolerance and a sufficiently long time horizon to ride out the volatilities associated with equity investments.
- If you do not have a PPF account and you are 15 or 20 years away from retirement, you should open a PPF account and start making regular deposits, so that you can accumulate a corpus by the time you retire. As you approach retirement, your risk tolerance goes down and PPF is a better investment option in such a situation.
- Investors with moderate risk tolerance level can invest in both PPF and ELSS in accordance with their optimal asset allocation strategy. You can read about some general asset allocation guidelines in our article, Asset Allocation strategies for different age groups.
- Salaried individuals are mandatorily required to contribute a portion of their salary to employee provident fund (EPF). The EPF interest rate is similar (slightly lower) to the PPF interest rate and the maturity amount is tax free. The EPF contribution of the employee goes towards the 80C tax savings. Therefore they should opt for ELSS, unless they are near retirement. Investment in ELSS through systematic investment plans (SIPs) over a long time horizon will help you both in tax planning and retirement planning.
- Self employed individuals should make regular PPF deposits for their retirement planning. It is a good idea to extend your PPF even beyond maturity in blocks of 5 years, if you do not need the liquidity immediately. You can continue to make deposits to your PPF. Even if you cannot make deposits every year, you can stay invested in PPF and your accrued balance will continue to earn tax free interest.
- Investment horizon is another important consideration, in deciding between PPF and ELSS. The tenure of PPF is 15 years with very limited liquidity during the term of the investment. If you have an investment horizon of 5 to 10 years for any specific financial objective, then you cannot rely on PPF. ELSS may be a good investment choice for a 5 to 10 year time horizon, provided it is suitable for your risk profile.