SIP VS GOVERNMENT SCHEMES: WHERE SHOULD YOU INVEST FOR A STRESS-FREE RETIREMENT?

Retirement planning is crucial for financial stability when you don’t have a fixed regular income. Investors often consider two primary options: Systematic Investment Plans (SIPs) and government-backed schemes when it comes to retirement. The most challenging task is when a person has limited money to deploy for retirement and he is confused between government schemes vs equity investment options.

The best strategy at this point could be to find out the returns during the tenure that you are targeting to park your money in a particular investment option. Let’s say you wish to invest in a government scheme, then you can check the interest rate and how much it would be in 10-20 years. Similarly, you can check the average returns in the mutual fund you wish to invest in and accordingly deploy your money. Let’s make it easy for you to decide between government schemes and SIP.

Investing Through SIP

SIPs enable investors to contribute a fixed amount regularly into mutual funds. This method encourages disciplined saving. Adhil Shetty, CEO of Bankbazaar.com, says, “SIPs are subject to market risks but have historically delivered annual returns ranging from 12% to 15%. These returns, though not guaranteed, have the potential to outpace inflation and build substantial wealth over time.”

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Let’s look at this in more detail.

Government Schemes

1. National Pension System (NPS)

NPS is a government-regulated retirement savings scheme with low management costs. It provides market-linked returns, typically between 8% and 10%. Investors can benefit from tax deductions under sections 80C and 80CCD(1), up to a total of Rs 2 lakh. The scheme mandates partial annuitisation at retirement, ensuring a steady income post-retirement.

2. Senior Citizen Savings Scheme (SCSS)

SCSS is specifically designed for individuals aged 60 and above. It offers a fixed interest rate of 8.20% per annum, with a tenure of five years, extendable by three years. The interest earned is taxable according to the investor’s income slab, but the scheme provides a secure and predictable return.

3. Public Provident Fund (PPF)

PPF is a long-term investment option with a 15-year lock-in period. Currently it offers an interest rate of 7.10% per annum. Contributions to PPF are eligible for tax deductions under Section 80C, and the returns are entirely tax-free. This scheme is popular for its safety and tax benefits.

Calculation to Simplify

Let’s compare the potential outcomes of investing ₹10,000 monthly over 20 years in each option.

SIP:

Assuming an average annual return of 10%, your investment would grow to approximately ₹76 lakh.

NPS:

With an average return of 9%, the corpus would accumulate to around ₹66 lakh.

PPF:

At a 7.10% interest rate, the total corpus would be about ₹52 lakh.

SIPs offer the potential for higher returns, albeit with market risks. On the other hand, government schemes like NPS and PPF provide stable, predictable returns and tax benefits, making them suitable for risk-averse investors. A balanced retirement portfolio might combine both SIPs and government schemes, tailored to individual financial goals and risk tolerance. So, you can create your retirement portfolio based on the suitable financial goals and needs.

2025-02-04T10:29:32Z