The habit of investing ₹1 lakh annually can build a substantial corpus over the long term. However, the final amount depends on where the money is invested and the returns generated.
To understand this, let’s assume you invest ₹1 lakh every year for 15 years. Your total invested amount during this period would be ₹15 lakh. Now, let’s see how much this money could grow if invested in Fixed Deposits (FDs), the National Pension System (NPS), and mutual funds.
How much money in an FD after 15 years?
Let’s assume an annual interest rate of 7.1% for the FD. If ₹1 lakh is invested annually at this rate, the corpus could grow to approximately ₹27.12 lakh after 15 years. This includes your principal investment of ₹15 lakh, with interest earnings adding about ₹12.12 lakh.
However, this is merely an estimate. Actual earnings from an FD will depend on the bank's interest rate, the tenure of the deposit, and the compounding method used.
How much money can be accumulated in NPS?
Unlike FDs, the NPS does not offer a fixed interest rate. Funds are invested across asset classes such as equity, corporate debt, and government securities. Returns depend on market performance and your chosen asset allocation.
For calculation purposes, let’s assume an average annual return of 10%. Investing ₹1 lakh annually at this rate could result in a corpus of approximately ₹34.95 lakh after 15 years. Your total investment would be ₹15 lakh, with returns contributing about ₹19.95 lakh.
How much money can be accumulated in mutual funds?
Now, let’s look at the figures for mutual funds. Here, let’s assume an average annual return of 12%. Investing ₹1 lakh annually at this rate could lead to a corpus of approximately ₹41.75 lakh after 15 years. Your total investment would be ₹15 lakh, with returns contributing about ₹26.75 lakh.
However, much like the NPS, there is no guarantee of a 12% return in mutual funds, as they are market-linked investments. Actual returns may vary depending on market movements.
How do the three compare?
Investment Option | Annual Investment | Total Investment (15 Years) | Estimated Returns | Amount after 15 Years
FD | ₹1 lakh | ₹15 lakhs | ₹12.12 lakhs | ₹27.12 lakhs
NPS | ₹1 lakh | ₹15 lakhs | ₹19.95 lakhs | ₹34.95 lakhs
Mutual Fund | ₹1 lakh | ₹15 lakhs | ₹26.75 lakhs | ₹41.75 lakhs
Based on these estimates, a corpus of approximately ₹27.12 lakhs could be created with an FD, ₹34.95 lakhs with NPS, and ₹41.75 lakhs with mutual funds. This implies a difference of about ₹14.63 lakhs between an FD and a mutual fund. Meanwhile, the estimated corpus for NPS is approximately ₹7.83 lakhs higher than that of an FD.
Understand the impact of compounding
Your investment amount is the same across all three options—FD, NPS, and mutual funds. The difference arises from the rate of return. Over the long term, this difference becomes significant. With continuous investment over 15 years, the returns also grow alongside the investment. Consequently, the effect of compounding can be substantial over the long term.
FD, NPS, or Mutual Fund?
Returns on an FD are relatively fixed; therefore, this option is suitable if you wish to minimize risk.
NPS is designed for retirement planning. It offers market-linked returns and allows investors the flexibility to choose their asset allocation.
Mutual funds also carry market risk, but they offer the potential for higher returns over the long term.
Therefore, one should not make a decision based solely on the final corpus amount after 15 years. Factors such as risk, investment goals, time horizon, and liquidity needs should also be considered.
Disclaimer: This content has been sourced and edited from Money Control. While we have made modifications for clarity and presentation, the original content belongs to its respective authors and website. We do not claim ownership of the content.
