When planning your investments, it is important form a plan based on your current finances, risk tolerance, and future goals. Smart financial planning is guided by the desire to meet your financial targets, build wealth and provide long-term stability amid ever increasing cost-of-living, medical and lifestyle inflation.
The public provident fund () and systematic investment plans (SIPs) are both long-term investment instruments that you can use to meet financial goals such as funding of wedding, children’s education abroad, buying a house, retirement fund or even building wealth.
How much can ₹2,000/month in PPF and SIPs earn over 30 years?
- ₹2,000 invested per month in PPF at 7.1% rate of return for a period of 30 years, accumulates a total corpus of ₹24,72,146 at end of term. This includes ₹7,20,000 invested amount and ₹17,52,146 earned . (This does not account for inflation)
- ₹2,000 invested per month in PPF at 7.1% rate of return for a period of 30 years, accumulates a total corpus of ₹70,59,827.55 at end of term. This includes ₹7,20,000 invested amount and ₹63,39,827.55 expected returns. (This does not account for )
- ₹2,000 invested per month in SIPs at 12% rate of return for a period of 30 years with inflation at 6%, accumulates a total corpus of ₹12,29,187.5 at end of term. This includes ₹7,20,000 invested amount and ₹5,09,187.5 expected returns.
PPF: What are reasons to choose provident fund?
PPF has long been among the top choices when it comes to long-term financial planning. Launched by the Centre in 1986, it is a reliable, low-risk government backed scheme with consistent and guaranteed returns.
Among the safest investment options for tax planning and an effective wealth builder, individuals and joint holders can open a PPF account at your nearest post office, any public bank and few private banks. The initial deposit ranges from ₹100-500 to be submitted along with an application form, photo and stated KYC documents. Here’s why this makes sense for investors:
- Tenure: The account is for 20 years, including a lock-in period of 15 years. It also offers indefinitely renewable extension in five-year blocks each.
- Risk: It is a risk-free investment with guaranteed return as per fixed interest rate of 7.1% this quarter. Notably, this is reviewed each quarter.
- Tax benefit: It is EEE instrument where investment is exempt from , the maturity amount is exempt from taxes, and interest earned is also exempt from income tax at time of payout.
- Tax saving: A total of ₹1.5 lakh annual contribution is exempt under Section 80C of the Income-Tax Act for old tax regime. There is no similar benefit at present under the new tax regime.
- Loan collateral: The is accepted as loan collateral after 1 year (up to 25% of balance).
- Withdrawals: Partial withdrawal is allowed after five years of opening an account only for specified reasons. Full withdrawal is allowed after the 15 years lock-in period ends.
SIPs: Why should investors choose mutual fund exposure?
A Systematic investment plan () is a realistic and long-term option for most retail investors to build a significant corpus in mutual funds. An SIP allows investors to deduct a fixed amount into your preferred mutual fund scheme each month and also helps build financial discipline for the long run.
The biggest advantage when you in a mutual fund scheme is that the returns keep getting added to the corpus, thus letting it grow faster in the later years vis-a-vis initial years. The overall corpus, therefore, jumps at a rate faster than it did in the first few years. The faster pace of growth of a scheme’s AUM in the later years is also known as ‘compounding’.
- Tenure: Mutual funds allow you to set up SIP for any period from 6 months onwards with no upper limit.
- Returns: You can choose your rate of return (most choose 12-14%) as per your risk appetite. However, there is no government guaranteed payout for mutual funds, the payout depends on performance.
- Builds financial habits: For an SIP, you can put standing instructions in place with your banks and automate monthly or fortnightly (12 or 6) debits towards selected schemes, as per your choice.
- Builds wealth: Investing through an SIP means that your purchase units of a mutual fund each time you invest. For e.g. for each unit costing ₹10, an of ₹1,000/month gets you 100 units. Investing consistently for at least 10-15 years can reap significant benefits.
- Rupee cost averaging: Since prices fluctuate as per market performance, your units can cost most or less depending on increase or decrease in price per unit. Overall, spreading out of your investment over a long period of time averages out your cost of purchase, when compared to investment.
- Easy and convenient: It’s much more practical for most regular investors to set aside a monthly amount for investment rather than invest a full pot at once. This can range from ₹100 to ₹1,000 or even more, depending on your comfort. In any case, ₹1,000 once a month for 12 months is more achievable than ₹12,000 lumpsum in a single month.
- Systematic Withdrawal Plan: provides a stable and steady stream of income from your investments, allowing you to manage your expenses without impacting the entire invested corpus. For e.g. is your withdrawal sum is ₹10,000 per month, and if the NAV on the particular date is ₹20, a total of 500 units will be sold from your MF portfolio to provide the requested amount. The units sold will fluctuate depending on the NAV.
Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.