PPF and NPS are bad Investments for Young – Say NO
Union Budget 2016-17 has created lots of noise regarding taxation of pension products. It is important to not lose focus on growth or return potential of the investment in long term. In this article, Roboadviso will tell you where young people should invest for long term or for retirement purpose.
Avoid investing in Public Provident Fund (PPF)
Here is a simple analysis of annual contribution of Rs 100,000 each from the year 2002 till now in Public Provident Fund (annual interest rate assumed 8.50%) & Franklin India Prima Plus Fund (Equity Mutual Fund):
After 15 years, there is a difference of approx. Rs 56 Lakhs between Equity Mutual Fund Value and PPF Value. The tax implication will be NIL in both the cases. So, it is wise not to invest in PPF.
Avoid National Pension System (NPS) as well
Government has been promoting NPS for a long time. But they have not been able to fix the tax implication of MPS at the time of maturity. As announced in the Union Budget 2016-17, the 60% NPS corpus created after 1 April 2016 will be taxed as per marginal rate. Earlier, the 100% corpus was taxable.
Also, under the NPS scheme, the equity exposure is capped at 50% while rest can be invested in corporate and government bonds respectively. This reduces the growth or return potential of the investment.
NPS after adjustment for tax will most of the times underperform Equity Mutual Funds in Long Term.
What Roboadviso Recommends
In long term (10-15Years), Diversified Equity Mutual Funds are the most preferred and safest investment as the return potential is higher with huge liquidity and tax efficiency. On an average, funds are expected to deliver 15% return in long term
Overall, it is recommended that young investors should avoid PPF and NPS. Rather, they should build corpus in Equity Mutual Funds.