NSC vs Lump Sum Mutual Funds: Know where your Rs 2 lakh investment may grow faster in 5 years
NSC vs Mutual Funds Lumpsum: While you get a fixed return in National Savings Certificates (NSC) on a one-time investment, the return of a mutual fund investment through the lump sum option is market-linked. The NSC is a guaranteed return scheme; returns in mutual funds depend on the return on equity and other market instruments in which it has invested its money.
NSC vs Mutual Funds Lumpsum: When we talk about investment, we have two types of options: guaranteed return and market-linked. In guaranteed return options, there is a fixed interest rate and a return based on that. The interest rate may not be very high, but investing is nearly risk-free and ensures that your money grows. In market-linked programmes, there is no limit to return. E.g., stocks can grow many times their value in just one year, and mutual funds can also double their value in the same time frame. But there is always market risk involved. Whenever there is an economic downturn, locally or globally, even the best-performing stocks can give negative returns. So, when we talk about NSC vs lump sum investment in mutual funds, it's actually a debate between a guaranteed return option and a market-linked return option. Since one instrument is market-linked, we can never guess the return from it in one year. While the current interest rate in the post office is 7.7 per cent, we will assume that we will get a 12 per cent return in the mutual fund given that the benchmark Nifty 50 has given a 14 per cent CAGR in the last 10 years. Know what your Rs 2 lakh investment in each of the options may turn into in five years.
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What is post office National Savings Certificates (NSC)?
In post office NSC, money is deposited for five years. Investors get 7.7 per cent interest on it, which is compounded annually but payable at maturity. The minimum investment in the scheme is Rs 1,000 and in multiples of Rs 100, while there is no maximum limit on the investment. Any number of accounts can be opened under the scheme. Deposits of up to Rs 1.50 lakh in a financial year qualify for deduction under Section 80C of the Income Tax Act.
This scheme is also included in the portfolio of Prime Minister Narendra Modi.
What is lump sum investment in mutual funds?
A lump sum is a one-time investment in mutual funds. It's unlike a systematic investment plan (SIP), where you don't have to deposit a fixed amount every investment cycle. The option provides compound growth, so the older your investment gets, the higher the returns can be.
Rs 2 lakh investment in NSC
Since the scheme provides a 7.7 per cent compound interest rate, the person who invests Rs 2 lakh in the post office scheme will get Rs 89,807 as interest. It means after five years, their maturity amount will be Rs 2,89,807.
Rs 2 lakh lump sum investment in mutual funds
Since we are assuming that the investor would get a 12 per cent annual return in the scheme, on a Rs 2 investment, they will get Rs 1,52,468 as long-term capital gains, and their total value of investments in five years will be Rs 3,52,468.
What if lump sum growth is less than 12%?
If the return is 11 per cent on a Rs 2 lakh lump sum investment, capital gains will be Rs 1,37,012, and the total value will be Rs 3,37,012. At 10 per cent growth, capital gains will be Rs 1,22,102, and the total value will be Rs 3,22,102. At a rate of nine per cent growth, capital gains will be Rs 1,07,725, and the total value of the fund will be Rs 3,07,725.
What if the lump sum growth is 15%
If market conditions are favourable, equity mutual funds can easily grow up to 15 per cent. In that condition, on a Rs 2 lakh investment, capital gains will be Rs 2,02,271, and the maturity amount will be Rs 4,02,271.
Conclusion
Thus, we see that the lump sum option can help one get higher returns compared to NSC, even if they get a 10 per cent return. But one can't predict anything in a market-linked programme.
(Disclaimer: The calculations in the story are projections and not investment advice. Do your due diligence or consult an advisor before making an investment).