EPF vs SIP Returns: Which option may give higher return on Rs 11,000 monthly investment for 20 years?
Retirement Planning: EPF is a retirement scheme where the employee of a private sector makes a monthly contribution to generate a retirement corpus. The minimum basic salary to get an EPF account should be Rs 15,000. Systematic Investment Plan (SIP) is a method to invest in a mutual fund scheme. In SIP, an investor invests a predetermined amount every month or investment cycle.
Mutual Fund SIP vs EPF, Retirement Corpus Calculation: Investors seeking a sizable retirement corpus can invest their money in a number of schemes. Some of them choose guaranteed return investment plans, where they get returns in the form of interest rate. In such schemes, post tax returns may not be very high, but assured returns attract investors. Others, with a large risk appetite and seeking higher returns than guaranteed return plans, invest in schemes such as stocks, mutual fund SIPs, and lump sums. One can choose either of the two according to their investment duration, risk appetite, and financial goals. Two of the methods to generate a retirement corpus are- Employees' Provident Fund (EPF) and SIP mutual fund investment. In this write-up, we will discuss the features of the two schemes and which of them may give you higher returns on a Rs 11,000 monthly contribution for 15 years.
Photos: Unspalsh/Pixabay
What is Employees' Provident Fund (EPF)?
EPF is a retirement scheme where the employee of a private sector makes a monthly contribution to generate a retirement corpus. The minimum basic salary to get an EPF account should be Rs 15,000. The minimum EPF contribution is Rs 1,800, while the maximum is 12.50 per cent of the basic salary and dearness allowance (DA) of an employee. They can contribute more than that, but that will be counted in Voluntary Provident Fund (VPF).
What is Employees' Provident Fund (EPF)?
The benefit of contributing to EPF is that the employer also matches the amount and deposits it in the EPF account of the employee. The current interest rate in EPF is 8.25 per cent. EPF is an exempt-exempt scheme, where contributions up to Rs 1.50 lakh in a financial year, the interest earned on it, and the maturity amount are tax-free.
One can contribute to EPF till the age of 60. After 10 years of service, or at 58 years of age, EPF subscribers can withdraw their corpus.
Mutual Fund SIP
Systematic Investment Plan (SIP) is a method to invest in a mutual fund scheme. In SIP, an investor invests a predetermined amount every month or investment cycle. One can start SIP with as little as Rs 100 in some mutual fund schemes. SIP provides rupee cost averaging since an investor purchases the same net asset value (NAV) at different rates.
Mutual Fund SIP
When the share market rises and the price of a mutual fund NAV also rises, the investor buys fewer NAVs, but when the market falls and the NAV price also dips, the same investor buys more NAVs. In the long run, SIP investment can help one generate a large retirement corpus.
EPF corpus on Rs 11,000 monthly investment for 20 years
If one is contributing Rs 11,000 monthly to their EPF account for 20 years, during that period, the total investment of the EPF subscriber will be Rs 26,40,000. At an 8.25 per cent interest rate, the estimated corpus in 20 years will be Rs 67,22,851.58.
Retirement corpus with Rs 11,000 monthly SIP investment in debt mutual fund for 20 years
We are assuming an investor to get 8 per cent annualised returns on their SIP investment in a debt mutual fund. At that rate, estimated long term capital gains will be Rs 36,59,260, and the expected amount will be Rs 62,99,260.
Retirement corpus with Rs 11,000 monthly SIP investment in hybrid mutual fund for 20 years
We are expecting an investor to get 10 per cent annualised returns on their SIP investment in a hybrid mutual fund. At that rate, estimated long term capital gains will be Rs 53,23,854, and the expected amount will be Rs 79,63,854.
Retirement corpus with Rs 11,000 monthly SIP investment in equity mutual fund for 20 years
Here, we will assume the investor will get 12-15 per cent annualised return on their equity mutual fund investment, and we will calculate according to that.
At 12 per cent annualised return in an equity mutual fund, estimated long term capital gains will be Rs 74,78,431, and the expected amount will be Rs 1,01,18,431.
Retirement corpus with Rs 11,000 monthly SIP investment in equity mutual fund for 20 years
At 13 per cent annualised return in an equal mutual fund, estimated long term capital gains will be Rs 87,83,337, and the expected amount will be Rs 1,14,23,337.
Retirement corpus with Rs 11,000 monthly SIP investment in equity mutual fund for 20 years
At 14 per cent annualised return in an equal mutual fund, estimated long term capital gains will be Rs 1,02,68,215, and the expected amount will be Rs 1,29,08,215.
Retirement corpus with Rs 11,000 monthly SIP investment in equity mutual fund for 20 years
At 15 per cent annualised return, estimated long term capital gains will be Rs 1,19,57,808, and the expected amount will be Rs 1,45,97,808.