PPF vs NPS vs MF: Which is the best option for retirement planning?
Retirement is one of the most important aspects of financial planning. For most of us, expenses do not stop, however, regular income stops in the retirement phase. So, it becomes very important to plan for your retirement. Many of us knowingly or unknowingly have already started provisioning for the same indirectly through contribution towards, EPF (Employee Provident Fund) and those who are self-employed are opting for PPF (Public Provident Fund).
NPS and PPF: A popular choice among investors
In recent years, NPS (National Pension System) has emerged as a popular choice and is making its own space among investors. PPF and NPS are both popular investment products available in the market that are promoted by the government with tax benefits for the same.
PPF is backed by the Government of India and mostly provides a fixed rate which the government announces every quarter. The interest compounding is done annually. Currently, PPFs are providing a 7.1 per cent rate of return. PPF follows a capital protection strategy and therefore has a conservative approach by usually investing in money market instruments.
NPS is more like an investment product where it lets its investors decide in which asset class they wish to invest and in what proportion. There are three asset classes available for investment through NPS viz. Equity, Corporate debt, and Government securities (Popularly known as ECG). Though they are somewhat similar to mutual funds, the structure is completely different. Mutual funds tend to be more flexible than NPS. Like mutual funds, NPS also has fund managers. If we look at the average 6-month, 1-year, 3-year and 5-year return provided by NPS, then for Tier 1 account Equity gave 17.09 per cent, 54.21 per cent, 14.66 per cent and 14.09 per cent, respectively. While Corporate debt gave, 5.09 per cent, 6.71 per cent, 10.89 per cent and 8.61 per cent, respectively.
So, assuming you are taking an aggressive approach, you will have maximum allowable exposure to equity of 75 per cent and the remaining 15 per cent in corporate debt and 10 per cent in government securities. The average 6-month, 1-year, 3-year and 5-year returns that you would have received is 13.94 per cent, 41.76 per cent, 14.05 per cent and 12.68 per cent, respectively.
The returns provided by NPS are better than PPF for the fact that NPS invests in equities.
Is Mutual Fund the right option?
Mutual funds also provide retirement funds under the solution-oriented category. There are different alternatives under this such as aggressive, moderate, and conservative along with different age groups. Ignoring this and if we simply average the returns provided by them, we find that they provided better returns than PPF however, lower than the NPS.
Who has the advantage?
So, now the question is should you opt for NPS or PPF or solution-oriented MF? The answer to the same is NPS for the fact that they tend to provide you with much more returns than that of PPF. The only advantage of PPF over NPS is its EEE (Exempt Exempt Exempt) tax status as compared to EET (Exempt Exempt Taxable) of NPS. However, overall NPS is a better product as compared to PPF for retirement planning.