SIP, NPS, EPF– Gone are the days when retirement planning was considered to be the lot of people in their 50s or 60s. Today, when job stability seems like an illusion and inflation is slowly eating away at your savings, it is now important to start preparing for retirement at the age of 20 or 30. The question is which of the many financial options to choose from, such as SIPs from mutual funds, National Pension Scheme (NPS) or Employees’ Provident Fund (EPF), which one should form the backbone of your retirement portfolio.

Consider the story of Amit and Sneha. Both are 35 years old and have almost the same income but their way of thinking and investing is completely different. Amit has been investing in mutual funds through SIP for the last 10 years and believes strongly in long-term growth and compounding in equities. Sneha, on the other hand, only contributes to her EPF and has recently started NPS to save tax. Both are planning for retirement but their thinking, risk-taking capacity and attitude towards market fluctuations are completely different.

Now the question is what should a common investor do. In this article, we will compare SIP, NPS and EPF. We will not only talk about their technical aspects but also how useful they are in real life. Whether you are just starting investing or are close to retirement, this article will help you understand and adopt one or more options as per your needs so that you can move towards financial freedom in your own way.

There are three main investment options in India when saving for retirement – SIP, NPS and EPF. Each option has its own nature and depends on the age, risk appetite and planning horizon of the investor.

What is SIP?

SIP or Systematic Investment Plan is the most popular way of investing in mutual funds. In this, the investor invests a fixed amount every month. These funds can be equity based, debt based or hybrid. SIP is a flexible option and can give good growth in the long term. Especially for those people whose goal is far away, equity SIP can prove to be better. Funds invested through SIP can be redeemed whenever you want, but tax-saving options like ELSS have a lock-in of 3 years. ELSS is a good option for both tax saving and better returns and gives exemption under section 80C of Income Tax.

What is NPS?

NPS or National Pension System is a voluntary scheme run by the government in which any Indian citizen between 18 and 70 years of age can invest. Even NRIs can invest in it. In this, the investor can choose a mix of equity, corporate bonds and government securities as per his choice. This scheme has been giving an annual return of 8% to 10%. Although money in NPS cannot be withdrawn till the age of 60, the tax benefits are quite attractive – ₹ 1.5 lakh is available under 80C and an additional ₹ 50,000 under 80CCD (1B). This scheme is suitable for investors with moderate risk appetite who want a long-term and structured plan for retirement.

EPF or Employee Provident Fund

EPF i.e. Employee Provident Fund is a mandatory savings scheme applicable in institutions having 20 or more employees. In this, both the employee and the employer together contribute 12% of the employee’s basic salary and DA every month. The government fixes the interest rate on this every year, which is currently 8.25%. EPF is safe and is also beneficial from the tax point of view because contribution, interest and withdrawal are all tax free (EEE tax system). However, EPF is very less liquid and money can be withdrawn only in situations like job loss, buying a house or medical emergency. This scheme is suitable for low-risk working people who want stable and safe returns.

Now if we compare SIP, NPS and EPF, SIP can give market based returns of 10% to 15% but the risk is also high. NPS gives balanced returns of 8% to 10% and the risk is moderate, while EPF gives a stable return of 8.25% and is the safest. In terms of liquidity, SIP is at the top, NPS is limited and EPF is the lowest. In terms of tax benefits, EPF and NPS are the best, while in SIP, exemption is available only on ELSS funds.

 

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