EPF vs NPS vs Mutual Fund: Which can create largest fund on Rs 10,000 monthly step up investment for 20 years?

EPF vs NPS vs Mutual Fund: There are many ways to create a retirement corpus.

One may generate it through market-linked and non-market-linked investments, including a pension scheme. National Pension System (NPS), Employees’ Pension Scheme (EPS), and mutual funds are 3 prominent ways in India to create a retirement corpus.

One may build a large corpus through either of them in the long run.

Contributions to EPF and NPS also provide tax benefits, while tax benefits in mutual funds are conditional.

Know in detail about all 3 and which of them can create the largest retirement corpus if one starts investing Rs 10,000 and increases their amount by 5 per cent every year.     

Employees’ Provident Fund

This is a default retirement scheme for private sector employees.

However, they can also opt for NPS or both.

The current EPF interest rate is 8.25 per cent.

In the EPF account of an employee, both the employee and the employer contribute.

From the employer’s contribution, some portion goes to the employee’s Employee Pension Scheme (EPS), through which the employee gets a monthly pension post retirement.

An employee with a minimum basic pay of Rs 15,000 can have an EPF account with a minimum monthly contribution of Rs 1,800.

The upper limit for the EPF contribution is 12 per cent of the employee’s basic salary and dearness allowance (DA).

PPF is an exempt-exempt-exempt scheme, where investment up to Rs 1.50 lakh in a financial year is tax-free under Section 80C of the Income Tax Act, 1961.

The interest earned and the maturity amount are tax-free.

There is no tax relief for the new tax regime.

National Pension System (NPS)

Unlike EPF, where the interest rate is fixed, NPS provides returns based on a mix of equity and debt.

One can opt for a minimum equity exposure of 75 per cent, and based on that, their corpus size may decrease.

For government employees, the employee contribution to an employee’s NPS account can be a maximum of 14 percent of the employee’s basic salary and dearness allowance (DA), while the employee contribution can be 10 per cent.

The employee can withdraw up to 60 per cent corpus at the retirement age of 60, while from the remaining 40 per cent, they need to purchase an annuity plan to get a pension.

If they want, they can purchase an annuity plan from 100 per cent of their corpus.

Contributions in NPS Tier I account provide tax benefits under Section 80CCD(1), 80CCD(1B). 80CCD(2).  

Mutual funds

Three main categories of mutual funds are equity, hybrid, and debt.

They have different levels of equity and debt exposures.

People seeking a retirement corpus can use all 3 to diversify their portfolio.

While equity focuses on growth, hybrid provides growth and stability, and debt focuses on stability.

In mutual funds, higher growth attracts higher risk. So, it is always advisable to keep a mixed portfolio to mitigate market risk. 

As far as tax benefits are concerned, investors may get them for investments in Equity Linked Savings Scheme (ELSS).

On a maximum contribution of Rs 1.50 lakh in ELSS, investors can avail tax benefits under Section 80C.

Calculations for story

Here we calculate the expected corpus created from EPF, NPS, and mutual funds.

We will start with a Rs 10,000 monthly investment and increase the amount by 5 per cent every year for 20 years.

Corpus from EPF in 20 years

In case one contributes Rs 10,000 from their side, the employer will also contribute Rs 3,670 from their side.

If the process goes for 20 years with a 5 per cent increase every year, the total investment in 20 years will be Rs 55,97,226, estimated interest will be Rs 74,42,334, and the estimated corpus will be Rs 1,30,39,560.

Corpus from NPS in 20 years

For NPS calculations, we are taking the example of a government employee who has opted for 75 per cent equity and 25 per cent debt exposure. 

In 20 years, the contribution will be Rs 57,27,252, estimated capital gains will be Rs 1,11,11,634 and the estimated corpus will be Rs 1,68,38,886.

Corpus from mutual funds in 20 years

We are calculating mutual returns at 12 per cent (equity funds), 10 per cent (hybrid funds), and 8 per cent (debt funds). 

At a 12 per cent annualised return, the investment will be Rs 39,67,914, estimated capital gains will be Rs 87,85,809 and the estimated corpus will be Rs 1,27,53,723.

At a 10 per cent annualised return, estimated capital gains will be Rs 63,32,106 and the estimated corpus will be Rs 1,03,00,021

At an 8 per cent annualised return, estimated capital gains will be Rs 44,06,626 and the estimated corpus will be Rs 83,74,541.