Did you know that systematic investment plans (SIPs) and public provident funds are two options you have if you wish to build money over the long term and make preparations for your future objectives? (PPF). How would you choose between these two options? In other words, how can an investor decide between a PPF and a SIP?
Set Your Goal First
What exactly do you mean by goals? A goal is nothing more than a fantasy with associated costs. Saying "I wish to be content after retirement" is insufficient. That is only a fantasy. You must be able to assign a number to it in order to turn it into a goal. How much money will you need in retirement? The amount of money you should set aside for your daughter's education is what. How do you intend to make the down payment on your mortgage? These are goals since they have a deadline and financial repercussions.
For long-term investments, PPF and mutual fund SIPs are both good options. The distinction is that it is an equity product because SIPs are typically done on equity funds. PPF, on the other hand, is a debt product that offers yearly returns that are fixed.
Let's start with a very basic understanding of the SIP and PPF concepts.
Do read :- Mutual Fund SIP: What happens when you miss a monthly contribution?
Top SIP Plans to Invest in India in 2022: Best SIP Plans
A Systematic Investment Plan (SIP) is exactly what?
Let's engage in a little game. Your dad accepts Rs. 100 from you and returns 5% extra at the end of each month. Thus, after one month, Rs. 100 becomes Rs. 105, and after two months, Rs. 105 becomes Rs. 110.25. Do you have any clue how much cash you might amass in this manner? Think again if you believe that Rs. 100 is a minimal initial investment.
Your initial investment of $100 will increase to $35,000 in ten years, $1.21 billion in twenty years, $425 billion (amazing!) in thirty years, and $150,000 billion in forty years. Is that actually true? This is known as the power of compounding, and it is actual. SIP involves both compounding and regular fixed-sum investments. SIP is a method of making periodic modest investments in mutual fund schemes (usually equities funds).
What Benefits Does SIP Offer?
Public Provident Fund, sometimes known as PPF, is a savings programme supported by the government that normally pays out 7.1% yearly. As there are no payouts in between, PF again compounds money. Compounding still applies as the interest is instead applied to your principal. However, because PPF is a debt instrument, the returns are set and only the government may occasionally alter them. Earnings cannot exceed or fall below the rate. The government, however, has guaranteed the principle and interest, and the money are completely secure. Therefore, PPF offers higher safety at a lower return.
Therefore, Why Should SIP Be Preferred At All If SIP Are Riskier?
It's like living by that core principle. If you want bigger profits on any enterprise, you must take on more risk. You must, of course, take measured risks rather than rash ones. Purchasing SIPs rather than PPF is equivalent to accepting a bigger calculated risk. Over a longer period of 15 to 20 years, an equity SIP can provide average annual returns of 12 to 15%. SIPs in equity funds are therefore essential if you wish to build money and prepare for your ambitions. The general guideline is to have more equity when you are young and keep increasing debt as you become older. However, if you want to achieve your objectives in the long run, You must make SIP investments in equities funds. PPF, while secure and safe, won't be sufficient. While equities fund SIPs are influenced by stock market volatility, PPF returns are not. The biggest danger, though, is not taking enough risks, in the end.
Okay. Can I Expect High Returns In The Next Year If I Invest In Equity SIP?
No, that is not how it functions. For equity fund SIPs to significantly outperform other classes like debt, it takes time—at least 7-8 years. If you start an equity fund SIP and anticipate huge profits in two to three years, you can be let down. But your chances of earning bigger returns from equities mutual fund SIPs are substantially higher if you keep up the SIP for at least 7-8 years.
What is the bare minimum in SIP and PPf that I need?
Because of the reasonable entry requirements, anyone can easily afford to open a PPF or SIP account. The majority of mutual fund plans permit SIPs with a minimum of Rs. 500 each month. Higher quantities are an option, but you are free to choose them. There is no maximum amount. With PPF, you can deposit as little as Rs. 500, but the maximum is Rs. 150,000 every fiscal year. More than that cannot be invested in a single year.
Do PPF and SIP provide Me As An Investor Any Benefits?
Let me first discuss the PPF. You can receive an annual exemption under Section 80C for investments in PPF up to Rs. 150,000. You should be aware that this is the entire cap, which covers all Section 80C investments including life insurance, ELSS, and other expenses. There are no tax advantages for normal mutual funds when it comes to mutual fund SIPs. However, ELSS (equity linked savings plans) funds allow you to receive the same Section 80C advantage as PPF with an upper aggregate maximum of Rs. 50,000 if you want to invest over time. SIPs for mutual funds do not have a lock-in, while ELSS funds do have a 3-year lock-in. PPF, on the other hand, has a lock-in of 15 years.
SIP vs. PPF: Which Produces Higher Returns?
The time frame would be important. Equity fund SIP can potentially produce negative returns over the short term of one to two years. However, it has been shown that returns for equities fund SIPs are in the region of 12% to 15% if you retain the SIP for at least 7-8 years. Debt funds typically have an expense ratio of 7-8%, and hybrid funds would fall in that range. PPF now offers 7.1%, however that percentage is subject to periodic change. The lesson here is that equity fund SIPs may be your greatest option for wealth creation if you have a time horizon of at least eight years.
What Are The Tax Consequences Of PPf And SIP?
To understand the impact on taxes, let's summarise the difference in a table.
Last but not least, How Do I Choose Between PPF And SIP?
There is no either/or situation here. Both are necessary for you. Here's how to calculate your blend.
- If you're young, focus more on equities mutual fund SIPs, which may significantly increase returns and wealth over time.
- PPF is risk-free, secure, and tax-efficient, but you may only deposit up to Rs. 150,000 annually. SIPs are not subject to such limits.
- If kept for 8 years or more, returns on equity fund SIPs are significantly better, but short-term returns are variable, so adjust your expectations appropriately.
- Your investing goal will determine a lot. However, the majority of investors view generating money as their primary goal. PPF is therefore necessary for the fundamental security and stability. Beyond that, you require the strength of equities funds to increase your wealth and returns.
Equity fund SIPs have been popular over the past several years as a dependable way to build wealth over the long term. Before making a final choice on the mix, it is essential to speak with your financial counsellor.
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Mutual Funds