PPF or equity MFs? Better option for your retirement planning

Retirement planning is one of the major issues faced by people as there is less awareness that one must also give priority to save and invest for their retirement needs and some are of the attitude that we have enough to survive our retirement. But remember when you sit and calculate actually how much you would require in retirement then your eyes may pop out. Even if you decide to maintain your current lifestyle, the requirement of funds would be huge. Let’s take an example to understand the importance of it. Suppose keeping in mind your current lifestyle, your monthly expenses comes to Rs. 30,000. So if we assume the inflation rate to be 7 per cent pre-retirement as well as in post-retirement phase and expected rate of return in post-retirement phase to be 9 per cent and there is still 30 years to go for your retirement with life expectancy till you turn 85. Then to fund your retirement you would require Rs. 5.48 crore.

Keeping these factors in mind, is PPF (Public Provident Fund) a better option or should you consider equity MFs instead? In case of PPF, the maximum contribution that you can do annually is Rs. 1.5 lakhs for every account. Assuming PPF giving CAGR (Compounded Annual Growth Rate) of 8 per cent, at your retirement age of 60 you would be able to accumulate Rs. 1.83 crore. So even if we assume you contribute Rs. 3 lakh in PPF (one PPF account in your name and the second one in your spouse’s name) still at your retirement age you would end up having Rs. 3.67 crore whereas, your requirement is Rs. 5.48 crore.

Now let’s have a look at equity MFs and how does it fair as compared to PPF. So if we assume equity MFs are giving CAGR of 14 per cent and you invest Rs. 1.5 lakh in equity MF then at your retirement age of 60, you would end up having Rs. 6.1 crore, which is 11 per cent more than your actual requirement. Even at 12 per cent CAGR, you only need to invest Rs. 2.3 lakh annually to fulfil your requirement of Rs. 5.48 crore.

So clearly from the above analysis, we can say that equity MFs are better option than PPF. However, it is also important to look at the amount of risk that you are able to take. PPF are backed by Government of India, so in terms of capital or principal protection it scores over equity MFs and are considered to be safe investment option than equity MFs. If you are still sceptical about investment in equity MFs then you may opt to invest 50 per cent in PPF and remaining 50 per cent in equity MFs. Considering the above example, if you invest 50 per cent in PPF and 50 per cent in equity MFs then till your retirement you need to invest Rs. 2.75 lakhs every year to get Rs. 5.48 crore by your retirement age of 60.