Making financial planning at the right age is the most important decision to live a self-reliant and worry-free life in the golden years of life i.e. after retirement. Often, employed and self-employed people are in a dilemma whether to invest their hard-earned money in safe government schemes or choose the path of SIP (Systematic Investment Plan) in stock market related mutual funds for wealth creation. In India, Public Provident Fund (PPF) for long-term safe investment and Sukanya Samriddhi Yojana (SSY) for the secure future of daughters are considered to be the two most reliable options, while on the other hand, mutual fund SIP has emerged as the first choice of investors to beat inflation and create wealth worth crores. If an investor is disciplined and saves ₹ 10,000 every month from today, then it is important for every wise investor to understand the accurate financial analysis of how big a fund can be created through these three options in 15 to 25 years. The most basic rule in the world of investing is the balance of risk and return. While on one hand, PPF and Sukanya Samriddhi Yojana provide Sovereign Guarantee of the Central Government and your principal amount remains completely safe, on the other hand, mutual funds involve the ups and downs of the market, but the compounding interest received over the long term takes it miles ahead of all other options. Along with this, it is also legally important to understand that Sukanya Samriddhi Yojana can be opened only in the name of a daughter below 10 years of age and its maturity fund is for the daughter's higher education or marriage, whereas PPF and SIP can be used by the individual freely to build his personal retirement and pension fund. Public Provident Fund (PPF): Account for ₹10,000 per month for a secure retirement Public Provident Fund (PPF) has been the most preferred traditional investment vehicle for the salaried and middle class of India. The central government is currently offering 7.1 percent annual interest on PPF, which is compounded every year. A maximum of ₹1.5 lakh can be deposited into a PPF account within a financial year. In this sense, if you deposit ₹ 10,000 every month, your total annual investment comes to ₹ 1,20,000, which is exactly within the prescribed limit. The initial lock-in period of PPF is 15 years. If you deposit ₹10,000 per month for 15 consecutive years, you will have a total investment of ₹18 lakh in your pocket in 15 years. At the current interest rate of 7.1%, after 15 years you will receive a maturity fund of approximately ₹32.55 lakh, of which ₹14.55 lakh will be the interest earned only. But from a retirement planning perspective, the real magic starts after 15 years. There is a facility to extend PPF in a block of 5 years. If you continue this for 25 years, your total investment will be ₹30 lakh, but in the 25th year you will have tax-free funds in your hand of about ₹1.03 crore. PPF comes in the 'EEE' (Exempt-Exempt-Exempt) category, that is, there is no tax on investment, interest and maturity. Sukanya Samriddhi Yojana (SSY): Daughter's future secured with 8.2% interest rate If you have a daughter below 10 years of age in your family and you are concerned about her future as well as the financial security of the family, then Sukanya Samriddhi Yojana (SSY) is the highest returning small savings scheme of the post office. The central government is currently offering 8.2 percent annual interest rate on this scheme, which is a full 1.1% higher than PPF. In this scheme also, a maximum of ₹ 1.5 lakh can be deposited annually, so an investment of ₹ 10,000 per month (₹ 1,20,000 annually) is completely acceptable in this. The rule of Sukanya Yojana is that in this, money has to be deposited only for 15 years from the date of account opening, whereas the account matures in 21 years. That means, in the last 6 years, you do not have to pay any money from your pocket, but the government keeps adding interest at the rate of 8.2% annually on the entire amount deposited in the account. If you deposit ₹10,000 every month, your total investment in 15 years will be ₹18 lakh. But when this account matures on completion of 21 years, your daughter will get a lump sum corpus of around ₹55.6 lakh to ₹56 lakh. This scheme also completely comes under the scope of EEE tax exemption. Although it is not technically meant for individual retirement, it saves your main retirement fund from getting depleted by meeting the big expense of your daughter's education or wedding. Mutual Fund SIP: Machine of Wealth Creation, ₹ 10,000 will create a fund of ₹ 1.9 crore for retirement planning. When it comes to wealth creation and beating inflation, Equity Mutual Fund SIP has no match. As per historical data, India's top diversified equity funds, flexi cap or Nifty 50 index funds have delivered an average CAGR of 12 to 14 percent over a period of 15 to 20 years. If we assume a conservative and realistic 12 per cent annual return, the corpus created from a SIP of ₹10,000 per month could be bigger than you imagine: 15-year scenario: Depositing ₹10,000 every month will result in a total corpus of ₹18 lakh in 15 years. At an expected return of 12%, after 15 years you will have a corpus of around ₹50.45 lakh (which is around ₹18 lakh more than PPF). 20 Year Scenario: If you continue this for 20 years, the total investment will be ₹24 lakh, but at 12% your total fund will grow to around ₹99.91 lakh (about ₹1 crore). 25 Year Scenario (Ideal Retirement Time): By doing a continuous SIP of ₹10,000 per month for 25 years, your total investment will be only ₹30 lakh, but with the power of 12% annual compounding, you will end up with a huge retirement corpus of around ₹1.89 crore to ₹1.90 crore in your account after 25 years. If returns reach 13% or 14%, the figure could even reach ₹2.5 crore to ₹3 crore. Direct comparison of all three options: where is the advantage and where is the disadvantage? It is essential to understand the functioning, liquidity and risks of the three assets before taking an investment decision. While PPF and Sukanya schemes offer assured interest and zero risk, the lock-in period is quite strict. In PPF, before 15 years, only partial withdrawal is allowed on special conditions. Under Sukanya Yojana, only 50% of the amount can be withdrawn for higher education after completing 18 years of age, the remaining amount can be withdrawn only after 21 years of age. On the other hand, mutual fund SIP offers higher liquidity. If you are not investing in an ELSS tax saver fund, you can redeem your units whenever you want in case of an emergency, although it is wise to hold for the long term for retirement goals. On the tax front, long term capital gains (LTCG) up to ₹1.25 lakh in a financial year in mutual funds are tax-free, and profits above that are taxed at 12.5%. Despite this, even after tax deduction, the net returns of SIP remain much higher than fixed deposits and PPF. What should be the right retirement strategy for a wise investor? Financial planners are of the unanimous opinion that no investor should put all his money in a single basket. If you have the ability to save ₹10,000 every month, the most balanced strategy is to adopt a 'hybrid approach'. If you have a young daughter at home, put ₹3,000 of the ₹10,000 in Sukanya Samriddhi Yojana for a safe 8.2% return, keep ₹2,000 in PPF for a tax-free safety net, and start a disciplined SIP of the remaining ₹5,000 in a good flexi-cap or large-and-mid cap mutual fund. If you don't have a daughter and are planning purely for your retirement, the 70:30 formula would work best. That is, put ₹7,000 per month in mutual fund SIPs to easily beat inflation (which remains at 5 to 6%), and put ₹3,000 per month in PPF so that your portfolio remains a stable, safe and tax-free base even during major market crashes. A small disciplined step taken at the right time can guarantee you a respectable and self-reliant retirement life at the age of 60 with a corpus worth crores.
