Anisha’s approach to building long-term wealth is very sensible. The choice of their products is also good, as both PPF and do being saved equity The funds are designed as long term products, which are easy to use and provide good returns. The key difference between the two products is the way in which they generate returns. PPF is a government-sponsored scheme, where changes in interest rates in line with market rates are announced every quarter. For an investor, the direction of rates is the least predictable, while the actual rate may vary from quarter to quarter depending on market conditions. PPF is an income-oriented scheme which earns its returns mainly from interest income. The best thing about PPF is that its interest is tax free and it is reinvested every year. Hence, steady growth can be achieved with PPF.

Equity Linked Tax Saving Schemes of Mutual Funds are a managed portfolio of equity shares. Returns on these products depend on the market’s return from equities, which is subject to economic cycles. By its very nature, equity investments will be volatile, earning more than PPF in an upcycle and worse than PPF in a down cycle. However, given Anisha’s long-term investment horizon, it will be even more exhausted. Combining the two products gives Anisha the best of both worlds. He has the security and stability of PPF combined with the growth and appreciation of equities. Investing in falling markets gives Anisha the added benefit of lower costs. He should stick with this sensible strategy to build his long term wealth.

Content on this page is courtesy of Center for Investment Education and Learning (CIEL).
Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.