The EPF, PPF, and NPS are popular retirement products for Indians. All are regulated by the Government organizations EPFO and PFRDA. Saving and investing in these products provides social security and also government supports them and promotes them by providing various tax benefits.
You will explore how to plan for retirement using these products in Retirement Planning Series. In the previous post of the Retirement Planning Series, We have discussed how your EPF alone for retirement is not sufficient for your life post-retirement. Recommend reading Retirement with EPF Corpus first to get better how far these retirement products help us to achieve your retirement goals.
You might have already known about EPF, PPF, and NPS. But still, let me explain in short.
What Is Employee Provident Fund(EPF)?
EPF is a retirement product designed for Employees. People who are employed in an organization are eligible for having an EPF account. Under EPF, every month 12% of your basic salary is deposited into your EPF account throughout your employment.
Throughout the investment period(employment period) you will get interest decided by the government, for FY2022, the interest rate is 8.1%(a 40-year low). so post-retirement you would get your retirement corpus alone with a steady income as a pension.
What Is Public Provident Fund(PPF)?
What about the people who are unemployed or self-employed? They are not eligible to have an EPF account. What if self-employed people want to invest in a safe instrument and protection backed by Central Government?
So the Self-Employed people, also get to open an account in any bank to invest in a similar product like EPF, with protection from the government and steady growth. But the interest rate for PPF products is usually 7.1% which is lower than EPF.
What is National Pension Scheme(NPS)?
NPS is also a retirement product but the difference from other products EPF, PPF and other post office schemes is that NPS allows the investor to invest in Stock Markets so that the investor gets better returns than other investment options.
Since it is market linked the returns expectations can be a little higher(10%-12%).
An important thing to remember here is that since this product is market linked you can get higher returns but don’t forget that Equities mostly perform great over the long term but in short term, there is a possibility of capital loss.
So it may not be a vice choice to invest in NPS when you are near your retirement.
Now without further due, let us find the answer to the question of whether is it wise to invest in NPS while investing in EPF and having invested in PPF for 15 years.
What acutally you make by investing in NPS?
NPS is a better product, but as said earlier NPS is a market-linked scheme, so as per history, Markets perform well over the long period but in the short term you may need to face short-term volatility. And when you are nearing your retirement investing in NPS may give lower returns and also lead to negative returns when markets fall or when a correction happens for any reason.
One can provide a better answer when you also provide your age.
As per the question, you invested in PPF for 15 years. So assuming you started investing in PPF when you are 25 and now your age will be 40.
So there are 20 more years for you to retire. 20 years is a pretty long time to stay invested in Equity linked products so no doubt you can invest in NPS.
Below is an image of the calculation of estimated returns of investing in NPS for 20 years, not to forget that even though there is a potential to earn higher returns, as you are nearing your retirement it is not good to invest heavily in equity, so returns of 10% a good fit for calculation.
Now, What is your investment amount?
Since you are investing in Stock Markets, it is always suggested to invest in regular mode(SIP). Investing in Lumsum is not suggested for various reasons, will discuss the same in later posts. But for now. Even though you have received lumpsum corpus from your withdrawn PPF account(which you have invested over 15 years), assuming you are investing in SIP mode.
What is the amount then?
At the age of 40, probably you can invest more but for calculation, let us assume you invest 10,000 Rs Every month. There are many reasons for this and tax benefits is one.
Here are the calculations.
By investing 10,000 regularly for 20 years, at a rate of 10%, assuming as you become closer and closer to retirement you reduce your reduction in Equity allocation and increase Debt allocation in NPS.
You have the potential to achieve a final corpus of 76 Lakhs by investing in NPS.
What if you have not invested in NPS? And Continued with PPF
Assuming you have saved at least 15 Lakhs in these 15 years of PPF investment. Even if you have invested 5,000 Every Month in these 15 years your PPF balance should be 16 Lakhs. So 15 Lakhs PPF balance is a fair assumption.
If you have just extended your PPF tenure till you retire, no more investments to your PPF account, then your 15 Lakhs alone would have grown up to 59 Lakh rupees.
To have an estimate of the earning potential of EPF: refer to this article where the returns from EPF are discussed and how it helps in retirement planning.
Summing it up
In NPS you are actively investing 10,000 Evey month and in PPF you just do nothing. You have invested 15 Lakhs at a time you have gained 59Lakhs, in the case of NPS you just starting with a 10,000 Rs investment per month.
If you have invested the entire 15Lakhs in NPS by withdrawing your PPF, then you might have achieved a very higher corpus maybe even more than a 1Cr, but there is a catch. If markets crash or are correct at the time of your investment then it takes a long time to recover your lost money in markets and you also lose the advantage of tax benefits if you invest at once in NPS.
Finally, in NPS your total investment was about 24 Lakhs to achieve 76Lakhs, in PPF there is no additional investment just continuing with the existing corpus.
Invest in NPS if you have a long time to retire. Even when you a just starting your investment in NPS at age of 40, in the 20 years you had the potential to build up to 79 Lakhs. But if you have started early in NPS at age of 30 or even less, you would have built crores for your retirement.
The final answer to your question depends on you. If you don’t want to take a task to invest actively or since NPS is market linked if you don’t want to worry about your investments during market cycles. Then you can continue with PPF since it also provides great corpus along with safety.