SIP vs PPF with Rs 1,45,000/year investment: Which can generate a higher corpus in 25 years?
A systematic investment plan is a way of investing a fixed amount in mutual funds at regular intervals that offers market-linked returns with potential for higher growth. On the other hand, Public Provident Fund, which is popularly known as PPF, is a government-backed savings scheme that offers a guaranteed return. Let’s just compare them to find out which can accumulate a higher corpus on Rs 1,45,000/year investment for 25 years.
Sudeep and Vivek, two friends in their 30s, were enjoying a cup of coffee when the topic of retirement planning came up. Sudeep trusts PPF because it offers safety and guaranteed returns. Vivek, however, prefers SIP, hoping for higher growth. Curious to see which option would work better, they both decided to invest Rs 1,45,000 annually for 25 years.
Years passed, and their investments grew. Now, it’s time to find out who built a bigger retirement fund. This comparison can also help you decide which option, PPF or SIP, can give you a higher return.
Photo source: Pixabay/Representational
What is Systematic Investment Plan (SIP)?
SIP is a way of investing a fixed amount in mutual funds. Individuals can invest daily, monthly, quarterly, or yearly in mutual funds.
What is PPF?
Public Provident Fund is a government-backed retirement scheme that is eligible for tax deductions under Section 80C of the Income Tax Act.
What is minimum amount to invest in SIP?
The minimum amount to invest in every mutual fund varies. Thus, there is no definite minimum investment amount, but some funds offer a minimum investment amount as small as Rs 100.
What is minimum and maximum amount to invest in PPF?
The minimum deposit in a year is Rs 500, whereas the maximum limit is Rs 1.5 lakh.
How does SIP work?
Investors select a mutual fund that aligns with their investment goals and risk tolerance.
Once a scheme is chosen, an SIP is set up with a specific investment amount and frequency (e.g., monthly, quarterly).
The agreed-upon SIP amount is automatically deducted from the investor's bank account at the pre-defined intervals.
The deducted amount is invested by the fund manager in the chosen mutual fund scheme, resulting in a specific number of units (or shares) being allocated to the investor.
The value of these units increases as the fund's Net Asset Value (NAV) increases, leading to growth in the investor's SIP investment over time.
Investors can choose to withdraw their accumulated wealth at the end of the SIP tenure or at periodic intervals.
How does PPF work?
You can start with a minimum deposit of Rs 500 per year.
Maximum Deposit: The maximum annual deposit limit is Rs 1.5 lakh.
Flexibility: You can deposit in a lump sum or installments.
Tax Benefits: Deposits are tax-deductible under Section 80C of the Income Tax Act.
Interest rate in PPF
Currently Public Provident Fund is offering an interest rate of 7.1 per cent.
Annualised return
Since there are no fixed returns in SIP investment, we are calculating as per annualised returns of 8 per cent (debt fund), 10 per cent (equity fund), and 12 per cent (hybrid fund).
PPF calculation conditions: Rs 1,45,000/year investment for 25 years
Yearly investment: Rs 1,45,000 (monthly investment Rs 12,083x 12 months)
Time period: 25 years
Rate of interest: 7.1 per cent
PPF: What will be your retirement corpus in 25 years with Rs 1,45,000/year investment?
On a Rs 1,45,000/year investment, the retirement corpus in 25 years will be Rs 99,64,414. The estimated total interest during that time will be Rs 63,39,414, and the invested amount during that time will be Rs 36,25,000.
SIP investment conditions
Since there are no fixed returns in SIP investment, we are calculating as per annualised returns of 8 per cent (debt fund), 10 per cent (equity fund), and 12 per cent (hybrid fund). We're also assuming a monthly investment of Rs 12,083(1,45,000/12)
SIP: What you can get on Rs 12,083 monthly investment for 25 years (hybrid fund)
At 12 per cent annualised growth, the estimated corpus in 25 years will be Rs 2,05,67,762. During that time, the invested amount will be Rs 36,24,900, and estimated capital gains will be Rs 1,69,42,862.
SIP: What you can get on Rs 12,083 monthly investment for 25 years (equity fund)
At 10 per cent annualised growth, the estimated corpus in 25 years will be Rs 1,50,21,098. The estimated capital gains will be Rs 1,13,96,198.
SIP: What you can get on Rs 12,083 monthly investment for 25 years (debt fund)
At 8 per cent annualised growth, the estimated corpus in 25 years will be Rs 1,10,54,005. The estimated capital gains will be Rs 74,29,105.