When it comes to building wealth over the long term, many investors in India often find themselves weighing three popular options - systematic investment plans (SIPs) in equity mutual funds, fixed deposits (FDs), and the Public Provident Fund (PPF). Each of them has its own unique blend of risk, return and tax implications. This makes the choice heavily dependent on your financial goals and risk appetite.
A SIP allows investors to make disciplined monthly contributions in the equity markets, offering the potential for higher returns but with market-linked volatility. FDs in banks are often considered as the traditional safe haven, since these provide guaranteed returns. But the problem here is that they often struggle to keep pace with inflation, especially over longer horizons. Meanwhile, PPF strikes a balance by offering assured returns along with attractive tax benefits, but it comes with a longer lock-in period.
Assuming that an individual contributes Rs 10,000 per month for 10 years across all three instruments, here's how the overall financial journey will look:
Mutual Funds SIPs
A SIP in equity mutual funds is specially designed for long-term investors who are looking to benefit from market-linked growth. However, these come with high risk compared to other instruments. Historically, equity mutual funds have delivered annual returns of about 12% over long periods.
Assuming that you invest Rs 10,000 on a monthly basis in a mutual fund generating an interest rate of 12% per annum, here's how the overall investment would look after 10 years.
- Monthly investment: Rs 10,000
- Tenure: 10 years
- Total investment: 12,00,000
- Expected rate of returns: 12%
- Estimated returns: Rs 11,23,391
- Maturity corpus: Rs 23,23,391
Public Provident Fund (PPF)
This government-backed scheme has been designed to offer secure returns to investors. The interest rate is decided by the government and currently stands at 7.1% per annum. Notably, in PPF accounts, maturity can be attained after 15 years, which can be extended in blocks of 5 years each.
At this rate, investing Rs 10,000 every month in PPF for a total of 15 years will generate Rs 32,54,567. In this, the invested amount will be Rs 18,00,000, and the total interest will be Rs 14,54,567.
Moreover, PPF offers tax benefits under Section 80C of the Income Tax Act, 1961. Also, the maturity amount is completely tax-free. This is the reason why it becomes an attractive option for conservative investors.
Also Read: How A Rs 20 Lakh Loan Against Mutual Funds Became Rs 3 Crore In 15 Years
Fixed Deposits (FDs)
A major highlight here is that FDs carry almost no risk. In this, people are required to deposit a lump sum with a bank or financial institution for a fixed tenure. This will earn you a guaranteed interest rate. This is the reason why returns from an FD are absolutely predictable. But the problem here is that they offer lower returns, especially if you take inflation into account.
Fixed deposits from various banks typically offer interest rates between 6% and 7% per annum for tenures of 5 to 10 years. Assuming that a person invests Rs 12 lakh in an FD generating interest of 7% per annum, here's what the investment would look like after 10 years.
- Tenure: 10 years
- Total Investment: Rs 12 lakh
- Returns: 7% per annum
- Interest Earned: Rs 12,01,917
- Final corpus: Rs 24,01,917
Also Read: Manicure To Subscriptions: 22-Year-Old's Gen Z' Expense List Feels Too Real
Essential Business Intelligence, Continuous LIVE TV, Sharp Market Insights, Practical Personal Finance Advice and Latest Stories — On NDTV Profit.