EPF vs NPS vs SIP: Which can generate highest retirement corpus on Rs 8,333 monthly investment for 25 years? Know here
EPF vs NPS vs SIP: Employees' Provident Fund (EPF) and National Pension System (NPS) are two retirement-centric central government schemes. Systematic Investment Plan (SIP) is a method of investing in mutual funds that can also be used to generate a retirement corpus in the long run.
EPF vs NPS vs SIP: Do you want to create a retirement corpus? What are the possible investment schemes that you can invest in? The choice may differ from person to person depending on their financial goals and the expected retirement corpus target. Their choice of scheme can be market-linked or non-market-linked, which may offer lump sum or monthly investment, or both. Among popular retirement schemes, Employees' Provident Fund (EPF) and National Pension System (NPS) have investments of crores of investors across India. While EPF offers fixed return, NPS is market-linked. Another option that investors often use to create a retirement corpus is Systematic Investment Plan (SIP) in mutual funds.
Photos: Unsplash/Pixabay
What is EPF?
EPF is a scheme run by Employees' Provident Fund Organisation (EPFO), where private sector employees can invest monthly. The current EPF interest rate is 8.25 per cent, which is reviewed by the labour ministry every 3 months. The special thing about EPF is that the employee and employer both contribute to the former's EPF account.
EPF contribution
The employee's contribution is distributed in 2 parts. Out of the maximum limit of 12 per cent contribution, the 3.67 per cent goes to the employee's EPF account, and the remaining 8.33 per cent goes to their Employees' Pension Scheme (EPS), the return from which is given to the employee as monthly pension at retirement.
EPF tax benefits
EPF is among a handful of schemes enjoying the exempt-exempt-exempt status by the Income Tax Department. The invested amount up to Rs 1.50 lakh in a financial year, the interest earned, and the maturity amount are tax-free in EPF.
What is NPS?
Launched in 2004 for central government employees, NPS was opened to all citizens in 2009. The unique thing about NPS is that it is a market-linked scheme where the NPS account holder can choose equity exposure up to 75 per cent based on their age and the risk appetite. One can make a monthly or lump sum investment in NPS. The NPS account holder can also increase the investment amount every year. Given equity exposure, an NPS account holder can generate a higher fund compared to someone who picks maximum debt exposure in the same scheme.
NPS withdrawal rules
At 60 years of age, a Tier I NPS account holder can withdraw up to 60 per cent of their retirement corpus if it is more than Rs 2.50 lakh. The remaining 40 per cent should be used to purchase an annuity plan. The return from the annuity plan provides monthly pension to the account holder.
NPS tax benefits
NPS Tier I account holders don't need to pay tax on the lump sum withdrawal and the annuity amount. However, earnings from the annuity are taxed.
What is SIP?
SIP is a method to invest in a mutual fund scheme, where an investor invests a fixed amount every investment cycle that can be daily, weekly, monthly, quarterly, half-yearly, or yearly. They can also opt for a step up SIP, where the SIP amount is increased every six months or a year.
SIP investment rules
The SIP can be stopped any time with prior notice to the mutual fund house. It can also be restarted any time. An SIP can be started with as little an amount as Rs 100. SIP provides rupee cost averaging and can help create a large corpus in the long run because of the power of compounding.
EPF: Corpus on Rs 8,333 investment for 25 years
The estimated total investment in 25 years will be Rs 25 lakh, and the estimated retirement corpus generated will be Rs 82,08,309.67.
NPS: Corpus on Rs 8,333 investment for 25 years
We are calculating the NPS corpus for a private sector employee opting for NPS Active Choice (investments 75 per cent in equity and 25 per cent in government bonds). As per the calculator, the expected corpus in 25 years will be Rs 1,42,04,843. Out of which, a 35-year-old who wants to retire at 60 can withdraw estimated Rs 85,22,906 as lump sum and get estimated monthly pension of Rs 31,961.
SIP: Corpus on Rs 8,333 investment for 25 years
Since we can't predict returns in SIP, we are taking 20-year historical annualised SIP returns (XIRR) of top large cap (equity), hybrid, and debt funds (source: Value Research).
SIP: Corpus on Rs 8,333 investment for 25 years (in equity fund)
Aditya Birla Sun Life Frontline Equity Fund - Regular Plan has given 15.03 per cent XIRR in 20 years. Based on that return, the expected amount on Rs 8,333 monthly SIP investment in an equity fund can generate estimated Rs 2,75,20,307.59.
SIP: Corpus on Rs 8,333 investment for 25 years (in hybrid fund)
The top hybrid fund in 20 years in terms of the highest SIP return is ICICI Prudential Equity & Debt Fund. It has given annualised return of 16.05 per cent return. Based on that return, the expected amount on investing Rs 8,333 monthly for 25 years can be Rs 3,33,57,263.11.
SIP: Corpus on Rs 8,333 investment for 25 years (in debt fund)
The top-performing debt fund in 20 years is SBI Magnum Constant Maturity Fund. It has given annualised SIP return of 8.15 per cent. Based on the same return, the expected corpus that can be generated in a debt fund in 25 years is Rs 81,75,993.38.