Savings are a good habit, but can only your savings fulfill your future needs, then the answer is yes, if saving in a smart way, you can fulfill your life goals. Can.
Like suppose you want to become a millionaire. For this, which investment option will you have to choose to become a millionaire as soon as possible.
Risk or Return?
Investment is measured on two scales, one is risk and the other is return. Many people do not want to take risk, so some put their money in safe investments like PPF. In which the risk is less. But many people have the ability to take a bit of risk and invest in equity mutual funds. Where the risk is there but the returns are also high.
Here we will compare investment in Public Provident Fund and equity mutual funds and try to understand which investment can be beneficial according to your goals & another saving tax on Income Tax filing times. Suppose your goal is to become a millionaire by investing 10,000 rupees every month.
Millionaires via PPF
PPF is getting 7.1% return for October-December 2020. PPF returns the government every quarter. Once upon a time there was also a 12% return on PPF, and it has also dropped to 4%. Well, let’s assume that the average return on PPF is close to 7.5%. If you are 30 years old, you started investing 10,000 rupees every month in PPF from today itself. Average rate of return is 8%. It will take you 27 years to become a millionaire from PPF.
10,0000 invested every month
Estimated Return Rate 7.5%
Total Investment Amount 32.40 Lakh
Estimated Return 72.70 Lakh
Total Value 1.05 Crore
Duration 27 years
Millionaires Through Equity Mutual Funds
Now if you invest the same amount of Rs 10,000 every month in an equity mutual fund, then see what happens. In the long term, equity mutual funds get an average return of 10-12%. Mutual funds have a higher return on investment than PPF. In such a situation, if you invest every month, you will become a millionaire in 20-21 years. That is, at least 6-7 years before mutual funds, you will have a crore amount in your hands.
10,0000 invested every month
Estimated Return Rate 12%
Total Investment Amount 25.20 Lakh
Estimated Return 88.66 Lakh
Total Value 1.13 Crore
Duration 21 years
It is also to be seen here that the amount invested in PPF is also high and it took more time to become a millionaire. But investment in mutual funds also had to be reduced and it took less time to become a millionaire as the returns were higher.
The basic difference between PPF and mutual funds
A-
The risk in Public Provident Fund mutual funds is nil.
Equity mutual funds have short term risk
B-
PPF has a lock in period of 15 years
Equity mutual funds such as ELSS have a lock-in period of just 3 years.
C-
Invested in PPF, you can withdraw some money only after 7 years with certain conditions
Money can be withdrawn at any time in mutual funds
D-
Investment in Public Provident Fund for 15 years gets 1.5 lakh rebate under 80C
Investment in ELSS for 3 years is exempted from 1.5 Lakh under 80C when filing Income Tax Return.
Tax in PPF and Equity Mutual Funds
PPF falls under the EEE category, i.e., there is no tax on investment, returns and maturity amount in anyone.
If you earn more than 1 lakh in a financial year in an equity mutual fund, then it is taxed at 10% long term capital gains tax when filing Income Tax return, but remember this tax is only on the amount above 1 lakh. That is 1 lakh is absolutely tax free.
