Mutual Funds, NPS, PPF Or SCSS: Which Investment Tool Is Ideal For Retirement Planning?

Everybody desires a stress-free retired life with stable finances. Typically, individuals invest in a mix of equity instruments, either by way of stocks or mutual funds, or debt instruments to build their retirement corpus. The best approach, however, is to understand one’s financial goals, needs, and current lifestyle expenses and take into account any expenses that one is likely to incur later in life, including health expenses, while factoring in inflation.

Investing Through MFs

Early in one’s life, one should ideally go in for equity investments, preferably through systematic investment plans (SIPs) according to experts.

Says Ketul Sakhpara, CFA and founder at BayFort Capital: “If the person is in their 40s or early 50s, then they should invest in SIPs, and if someone is close to retirement they should opt for government-backed schemes. For someone in their 40s or under 40, it is advised that 40 per cent of their investment amount goes into SIP and 60 per cent into government-backed funds.”

Types Of Government Schemes 

National Pension System (NPS): NPS is a government-backed retirement savings cum retirement scheme with low maintenance costs. It also offers market-linked returns, usually between 8 and 10 per cent. An individual can benefit from tax deductions under sections 80C and 80CCD(1), up to a limit of Rs 2 lakh. It allows partial annuitisation at retirement, making sure that the contributor gets a stable in the form of pension income after retirement. 

Senior Citizen Savings Scheme (SCSS): SCSS is designed for individuals aged 60 years and above. It offers a fixed rate of interest of 8.20 per cent annually, with a tenure of five years, which can be extended by three years.  

Public Provident Fund (PPF): PPF is a long-term government investment scheme that comes with a 15-year lock-in period. At present, it offers a rate of interest of 7.10 per cent annually. Contributions to PPF are eligible for tax deductions under Section 80C, and the returns are entirely tax-free. It comes under the EEE (exempt-exempt-exempt) category, where the investment, the interest on the interest as well as the maturity is entirely tax-free. 

Returns From Equity, NPS, PPF And SCSS 

Comparing the potential return of investing Rs 12,500 per month over 15 years in equity mutual funds through SIP, NPS, PPF and SCSS would give the following corpus at the end of the investment tenure. 

Mutual Fund SIP: Estimating an average annual return of 10 per cent, an individual’s investment would reach around Rs 52.24 lakh upon maturity. 

NPS: With an average return of 9 per cent, the corpus would reach approximately Rs 47.65 lakh. 

PPF: In case of PPF, the corpus would reach Rs 40.65 assuming a rate of interest of 7.10 per cent. 

SCSS: With a monthly contribution of Rs 12,500, this scheme would create a corpus of Rs 2.11 lakh in 5 years (maturity period). 

While mutual fund SIPs offer the scope of higher returns, they come with market risks. It is important to take the market volatility into account while investing. Meanwhile, government-backed schemes like PPF will offer guaranteed returns, which are predictable and come with tax benefits.  

Ultimately, an investor should go for a balanced approach keeping one’s financial goals and risk tolerance in mind.