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If you want to save Rs 10,000 every month and your aim is to create a big fund in the next 15 years, then you have two most preferred options. Government guaranteed PPF and second market based SIP.
While PPF guarantees 100% tax-free returns without any risk, SIP has the power to create a bigger corpus through wealth compounding in the long term. Let us understand from the real calculation of 15 years and the figures after tax deduction, how much benefit is there in each.
Understand the complete mathematics with the example of Rahul and Amit…
Suppose two friends, Rahul and Amit, plan to save Rs 10,000 every month for 15 years. During this entire period, there will be a total investment of ₹ 18 lakh from both their pockets.
- Rahul’s strategy: Rahul started investing in PPF while avoiding risk.
- Amit’s strategy: Taking risk, Amit chose the path of mutual fund SIP.
How much money will come to whose account after completion of 15 years…
Currently 7.1% compound interest in PPF
- Total investment in 15 years: Rs 18 lakh
- Total amount on maturity: Around Rs 32.54 lakh
- Tax deduction: Principal, interest and maturity are completely tax-free.
Rahul, who chooses the PPF route, will get ₹32.54 lakh in-hand after 15 years. This investment is completely safe, so Rahul will know from the very first day how much amount he will get on maturity.
12.5% LTCG tax will be deducted in equity SIP
Returns in mutual funds are not fixed, rather it depends on the performance of the stock market. Also, Long Term Capital Gains (LTCG) tax of 12.5% is deducted on withdrawal of money after more than 1 year. Look at Amit’s investment at 3 different return levels:
1. If 8% annual return is received
- Pre-tax total funds: ₹34.83 lakh
- In-hand after tax deduction: About ₹32.7 lakh
- Result: After paying tax, the benefit of SIP remains almost equal to that of PPF.
2. If 10% annual return is received
- Pre-tax total funds: ₹41.79 lakh
- In-hand after tax deduction: About ₹38.9 lakh
- Result: Amit will get about ₹6.4 lakh more than Rahul (PPF).
3. If 12% annual return is received
- Pre-tax total funds: ₹50.45 lakh
- In-hand after tax deduction: About ₹46.40 lakh
- Result: Amit will get around ₹13.90 lakh more than Rahul (PPF).
What suits your profile better?
- When to choose PPF: If you want zero risk on your savings, have a fixed corpus target for retirement or children’s education and want to take full advantage of tax benefits.
- When to choose SIP: If you have a 10 to 15 year horizon, you are not afraid of small market shocks and want to build a large wealth corpus by beating inflation.
- Expert Comment: A combination of both (e.g. 70% Equity SIP + 30% PPF) is considered to be the safest and growth giving formula in a long term portfolio.
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