If you have received a pay hike or a bonus and are confused about how to use it, there are some options. For salaried individuals in India, Provident Fund (PF) or investing through Systematic Investment Plans (SIPs) in mutual funds can be two options based on their risk profile.
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PF contributions offer a retirement-focused savings approach with relatively predictable returns. SIPs provide market-linked growth potential and greater flexibility in investment choices. One also has the option to increase their regular PF contribution by opting for voluntary PF. It is an extension of the same scheme and allows you to contribute more money into your fund, while receiving the similar benefits.
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Adding Rs 5,000 Into VPF:
Assuming you add Rs 5,000 per month into your VPF, for the first year, the returns will be negligible at Rs 2,750. However, over long-term, they may look like:
Amount: Rs 5,000
Investment duration: 20 year
Rate of return: 8.25%
Invested amount: Rs 12,00,000
Estimated returns: Rs 18,59,189
Total value: Rs 30,59,189
This means that over time, this additional contribution can generate solid returns of Rs 18.5 lakh. Coupled with your existing PF contributions, which are mandated by law, the corpus can be even higher as compounding gets to work on a higher sum.
Adding Rs 5,000 into SIP:
Instead of VPF, if you decide to go with SIPs, there is more scope for growth:
SIP amount: Rs 5,000
Investment duration: 20 year
Expected rate of return: 12%
Invested amount: Rs 12,00,000
Estimated returns: Rs 37,95,739
Total value: Rs 49,95,739
While SIPs are known to provide higher growth potential as they are market linked, returns are never guaranteed. Investors must assess their risk profile, goals and other financial obligations before opting for high risk investments.
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