Retirement plan: The Employee Provident Fund (EPF) is a retirement scheme that provides a lump sum amount and monthly pension after retirement. On the other hand, a Systematic Investment Plan (SIP) is an investment method for mutual funds.
Within a Systematic Investment Plan (SIP), individuals commit a consistent sum in each investment round. Individuals pursuing diverse financial objectives invest in both EPF and SIP. In today’s era, numerous investors allocate resources across both investment avenues. Delve into the specifics of each investment type to ascertain which choices could aid you in reaching a retirement fund of ₹1.50 crore.
What is EPF?
EPF is a retirement investment scheme run by the Employees’ Provident Fund of India (EPFO).
Every month, an employee contributes to their EPF account.
They can contribute a maximum of 12 per cent of their basic salary and dearness allowance (DA) every month.
The employer also has to contribute the same amount to the employee’s EPF account.
When the market falls, the individual buys more NAV, but the value of his investment goes down.
The other advantage is that SIP investing offers compounded growth, where the value of one’s investment can grow exponentially as time goes by.
Investors who do not have a large sum to invest at once and want to invest in smaller amounts in every investment cycle prefer SIP over lump sum investments.
Before comparing both the investment options, we need to keep in mind that EPF is a guaranteed return scheme where returns are received in the form of interest, while SIP is a market-linked program where returns can be much higher than EPF but where the investment can be negative if the market falls.
Since we don’t know how much return we can get in SIP, we will take a standard size return of 12 per cent.
In EPF, if you start contributing from the age of 25 till your retirement age of 60, you will get 35 years of investment.
If you get 8.25 per cent interest per annum and want to reach the target of Rs 1.50 crore by the age of 60, your monthly investment should be Rs 6,350.
Your maturity amount after 35 years will be Rs 1,50,29,133.18.
In SIP, if you start investing Rs 6,350 monthly at the age of 25 and get 12 per cent return on your investment, you can achieve the retirement corpus target of Rs 1.50 crore in just 27 years.
In 27 years, your invested amount will be Rs 20,57,400, long term capital gains will be Rs 1,34,15,875, while the expected amount will be Rs 1,54,73,275.
