New Delhi: Employees’ Provident Fund (EPF) is highly touted for its tax savings and instilling a disciplined long-term investment approach, whereas Systematic Investment Plans (SIPs) are known for their affordable investment amounts with an aim to deliver the highest market returns. But when it comes to creating a retirement corpus for your sunset years, which option takes the winning strike? Let’s first understand what EPF and SIPs are.
EPF interest rate, tax benefits
In India, the Employee Provident Fund, or EPF, is a savings scheme that remains popular among salaried individuals. The scheme is managed by the Employees Provident Fund Organisation (EPFO).
Currently, the annual compound interest rate for the fiscal year 2023-24 for EPF is 8.25 per cent. Under this scheme, the employee is liable to receive a lump-sum amount at retirement that includes the contributions made by both the employee and the employer.
Out of the 12 per cent employer contribution, 8.33 per cent goes towards the employee EPF account, and the balance of 3.7 per cent goes to the Employee Pension Scheme Account (EPS) in the form of pension post-retirement.
The major benefit of EPF is that one enjoys a tax benefit of up to Rs 1.50 lakh in a financial year under Section 80C of the Income Tax Act, 1961.
Mutual Fund investment: SIPs
With an SIP, you can invest a set amount of money, as low as Rs 100 or Rs 500, every month in a planned and consistent way. Most people choose to invest in equity schemes through SIPs. Even if you invest a small amount of money every month, it can grow significantly over time to help you build a retirement corpus.
SIPs are designed to help you buy fewer mutual fund units when the market is high and more when the market is low. This helps average out the cost of your investment and optimise your returns. You can gain from market volatility by buying less when markets are high and more when markets are low.
EPF vs SIP: Who wins?
Let’s compare both the investment options better with an example. When it comes to EPF, if an investor starts contributing to the EPF account from age 25 and continues until he reaches the retirement age of 60, that means he has invested for 35 years of his life.
Having said that, in order to create a corpus of Rs 2 crore by age 60, considering he gets 8.25 per cent annual interest, his monthly investment should be Rs 8,451. At the time of maturity at age 60, he would have built a corpus of Rs 2 crore.
When it comes to SIP, with the same monthly investment of Rs 8,451, assuming an average mutual fund return rate of 12 per cent over the next 35 years until retirement, he will accumulate Rs 2.95 crore, which is clearly more than EPF at the rate of 8.25 per cent.
The only difference here is that the investor gets the fixed guaranteed interest rate return under EPF, and as mutual funds are subject to market risk, there is no guarantee of returns.
Final Verdict
Deciding which financial instrument to invest in again depends on investors’ individual preferences. For the risk-averse investor, earning through EPF to build a retirement corpus can provide safety and stability. However, for investors who are willing to take a moderate to high risk to beat inflation, a mutual fund can be the best option.
Lastly, remember that because the market is volatile, there is no perfect time to start or stop SIPs. Mutual Fund investments are subject to market risks; hence, read all scheme-related documents carefully or seek the help of a financial advisor to understand the risks associated with equity mutual funds.
Confused between EPF or SIP to build your dream retirement corpus? This article explores the best option between EPF or SIP to create a Rs 2 crore retirement corpus. Business Business News – Personal Finance News, Share Market News, BSE/NSE News, Stock Exchange News Today
