SIP vs PPF: Risk or Guarantee? This investment option may help you reach Rs 1 crore milestone first

SIP vs PPF: We invest our money in two types of investments: market-linked and non-market-linked. Non-market linked investments are those where one gets a guaranteed return in the form of simple interest or compound interest. The return that they get may not be as attractive as in market-linked investment schemes, but they attract a large population because of their nearly risk-free nature. A lot of investors don't want their money to be stuck in a market-linked programme where returns depend on the health of the market. Some of the non-market-linked investment options are Public Provident Fund (PPF), Employees Provident Fund (EPF), fixed deposit (FD), recurring deposit (RD), National Savings Certificate, Senior Citizen Savings Scheme, and Post Office Monthly Income Scheme. 

Market-linked programmes, on the other hand, depend on the performance of the stock market.

When the market rises, they give good returns, when it falls, investors bear losses.

Market-linked investment options such as stocks and mutual funds can give a much higher return than the best non-market-linked programmes.

E.g., many PSU stocks in the last one year have grown more than 100 per cent, mutual fund categories such as PSU thematic funds have grown over 100 per cent in a year.

But there is always market risk involved. However positive the market is or the national economy is performing, there are always external factors that may jeopardise the performance of market-linked programmes. 

Performances aside, both market-linked and non-market-linked programmes are popular and have takers from all walks of life. 

PPF vs SIP

PPF is a non-market-linked investment option, while a systematic investment plan (SIP) is a method to invest in mutual funds and is a market-linked option.

Let's know a bit about both, and then we will draw a comparison about the estimated earnings from both options to reach the Rs 1 crore corpus milestone.

PPF 

PPF is a post office scheme that is also run by banks.

The scheme has a lock-in period of 15 years and provides 7.10 per cent annual interest compounded yearly.

The minimum investment in the scheme is Rs 500, while the maximum investment is Rs 1,50,000 in a financial year.

Deposits in the scheme can be made in lump sums or in installments.

It is one of the few exempt-exempt-exempt (EEE) category investment options where the investment, interest, and maturity amount are tax-free.

However, deposits of up to Rs 1.50 lakh in a financial year are tax-exempt.

The scheme provides the facility of a loan against a PPF deposit.

The account can also be extended for a further block of five years.

SIP

You can start an SIP in a mutual fund with as little as Rs 100.

However, most of the fund runs SIPs of a minimum of Rs 500. SIP can be daily, monthly, or yearly.

In SIP, one buys net asset value (NAV units) through a fixed amount every investment cycle.

When the market rises and the price of NAV is also high, the investor purchases fewer NAVs; when the market is low and the NAV rate is low, they buy more NAVs.

It helps them take advantage of rupee cost averaging.

Apart from that, NAV also provides the benefit of compound growth.

Many of the NAVs have grown from their starting prices of Rs 10 to many thousands in the last two decades. 

How to become crorepati through PPF and SIP

PPF investment

In PPF, you can deposit a maximum of Rs 1.50 lakh in a financial year, which is Rs 12,500 a month.

With that amount, your investment till the maturity period of 15 years will be Rs 22,50,000, while you will get Rs 18,18,209 in the form of interest.

Your maturity value will be Rs 40,68,209. 

At this stage, you need to extend your account for a further five years, i.e., a total of 20 years.

After 20 years, your total investment will be Rs 30,00,000, the interest will be Rs 36,58,288; and the maturity amount will be Rs 66,58,288. 

At that stage, you are nearly Rs 33 lakh short of your Rs 1 crore mark. Here, you need to take another five-year extension.

After 25 years, your investment will be Rs 37,50,000, interest will be Rs 65,58,015, and the maturity amount will be Rs 1,03,08,015.

SIP investment

Since there is no fixed return in SIP, we assume it to be 12 per cent given that the Nifty 50 benchmark has grown by 14 per cent in the 20 years.

We will also take the same amount, Rs 1.50 lakh a year, or Rs 12,500 a month, for investment in a SIP.

After 10 years, your investment will be Rs 15,00,000, while your long-term capital gains will be Rs 14,04,238 and the expected amount will be Rs 29,04,238. 

If you continue this investment for a further five years, i.e., a total 20 years, then your investment will be Rs 2250000, long-term capital gains will be Rs 40,57,200, and the expected amount will be Rs 63,07,200.

You are still short of Rs 37 lakh to achieve the Rs 1 crore mark. If you continue your investment for another four years, you will cross that barrier. 

After 19 years, your investment will be Rs 28,50,000, your long-term capital gains will be Rs 80,91,568, and your expected amount will be Rs 1,09,41,568. 

Now if you continue it for the same period as you give to PPF, 25 years, at that stage, your investment will be Rs 37,50,000, long-term capital gains will be Rs 1,99,70,439, and the expected amount will be Rs 2,37,20,439.

So, you can see here that in SIP, you can achieve the Rs 1 crore mark much faster than you can in PPF, but both are different things.

While PPF gives you a guaranteed return, SIP is a market-linked programme, and there is no guarantee that you will always gain.

There are times when the market is extremely low and SIP returns are negative.

So, one needs to consider their risk-appetite, financial situation and goals before opting for any of the investment option.