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What is EPF?
First of all, you should understand what is the EPF. It is a retirement investment plan, which runs the Employees Provident Fund Organization (EPFO). Every month, an employee contributes to his EPF account. They can contribute a maximum of 12 percent of their basic salary and dearness allowance (DA) every month. The employer also has to contribute the same amount to the employee’s EPF account. The employer has to contribute a minimum of Rs 1,800, while the maximum contribution is the basic salary of the employee and 12 percent of DA.
The EPFO gives the employee 8.25 percent annual compound interest rate. Employees can also cross the range of 12 percent contribution. But then, the additional amount will be known as the Voluntary Provident Fund (VPF). The advantage of investing in EPF is that in a financial year there is a tax exemption of up to Rs 1.50 lakh, which comes under Section 80C of the Income Tax Act, 1961.
What is sip?
Any person can invest in mutual funds through daily, monthly, quarterly or annual SIP. They invest a predetermined amount in every investment cycle. However, the SIP amount can also be increased every year. Such SIP is called top-up SIP. SIP provides the cost average to investors, where the rate of net asset value (NAV) varies with the growth and fall of the market.
Investors who cannot invest a large amount at a time and want to invest small amount in every investment cycle, they like SIP rather than in lump sum investment.
Before comparing both investment options, we have to keep in mind that EPF is a guaranteed returns scheme where interest is received in the form of interest, while SIP is a market-linked program where more than EPF can get more returns but investment can be negative when the market falls.
Because we do not know how much returns will be received in SIP, we will take a standard 12 percent return. In the EPF, if you start contributing at the age of 25 and do 60 years of retirement age, then you will get 35 years investment. If you get 8.25 percent annual interest and you want to get a fund of Rs 1.50 crore by the age of 60, then your monthly investment amount should be Rs 6,350.
After 35 years, your maturity amount will be Rs 1,50,29,133.18. In SIP, if you start investing Rs 6,350 monthly at the age of 25 and get 12 percent returns on your investment, then you can get a retirement fund of Rs 1.50 crore in 27 years. In 27 years, your invested amount will be Rs 20,57,400, long -term capital profit will be Rs 1,34,15,875, while the expected amount will be Rs 1,54,73,275.
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