Employees' Provident Fund (EPF) and Public Provident Fund (PPF) are truly long term investment instruments considered ideal for channelising your retirement savings. Those who are nearing their retirement now would tell you the importance of EPF and PPF in their retirement planning. Two decades ago, rate of interest on EPF savings was 12.0% which gradually came down to 8.5%. Yet, EPF and PPF continued to remain popular retirement savings avenues. The biggest advantage of investing in EPF or PPF has been their favourable tax status. Investors get tax benefits on the amount they deposit and the amount they withdraw along with tax free interest that accrues on their investments.

Over last 10-15 years, EPF has yielded better returns than those on PPF. But when adjusted for retail inflation measured by the movement of Consumer Price Inflation for Industrial Workers (CPI-IW), year- on-year real rate of returns or inflation-adjusted returns of EPF kept falling over last 15 years.
 

The trend in real returns of EPF
Note: For the purpose of calculation of real returns, CPI-IW data published by the labour ministry has been considered
(Source: Labour Bureau, epfindia.com, PersonalFN research)

The chart above exhibits how once EPF provided an appealing real rate of return a decade or more back and the descending trend in rates since then and how amid times of high inflation the real rate of return clocked plunged into negative.

Nonetheless, after generating negative real returns for the past few years, your investments have again generated positive returns in the year under progress ...and thanks to falling retail inflation for that. This may make year 2014 a memorable one for the beneficiaries of EPF scheme.

So, how is EPF as an investment avenue?
You see, EPF scheme makes it binding on you to save every month for your retirement and it also makes it difficult for you to withdraw money prematurely. The Employee Provided Fund Organisation (EPFO) and the Government have been trying to work out plans to make the scheme even more attractive for you. There has been a long standing suggestion that EPFO should consider investing at least 5% of its corpus in equity markets to accelerate returns, helping investors generate overall positive real returns. The finance ministry has already given approval to EPFO for investing 5% of its corpus in stocks. Similarly, the PMO has suggested that, EPFO and insurance companies should invest 15% of their Rs 6,50,000 crore corpus in housing finance companies engaged in low-cost housing to provide boost to affordable housing initiative.

Also, it is believed that there might be a need to relax the investment criterion of investing in only “AAA" rated bonds, which is being currently followed by EPFO. If EPFO is allowed to invest in AA+ rated bonds offered by housing finance companies, several companies such as GIC Housing, Canara Home Finance, ICICI Home Finance, Gruh Finance and Sundram Paribas among others would get access to fresh funds. This may serve the dual purpose. It would not only result in greater disbursal of loans, but would also help EPFO earn a little higher return due to rating differential.

But the aforesaid suggestions and thoughts are yet under consideration by the EPOF. They may shortly be taken up for discussion to achieve consensus and approvals from administrative authorities.

EPF vs. other retirement savings avenues
As of now EPF is a pure debt investment option which has a record of earning higher returns than those on the PPF (which is offering return of 8.70% p.a.). Moreover, recent records show that, returns on EPF have been higher than those generated by 4 out of 5 National Pension Schemes (NPS).

So being enthused by the aforesaid, you may also contribute voluntarily to the provident fund over and above the mandatory contributions. However, it is noteworthy that, such contributions are not matched with equal share from your employer. The maximum amount you can invest voluntarily is capped at Rs 1,50,000 or amount equal to your basic salary adjusted to dearness allowance, whichever is lower.

PersonalFN is of the view that, retirement planning is one the most important financial goals that all of us have. However, it would be a bad idea to solely depend on just EPF for taking care of your post-retirement expenses. PersonalFN is of the view that, you need to set a goal amount with which you may comfortably retire and then invest across asset classes depending on your risk appetite and years left until your retirement. EPF can be one of the options you may consider to take care of while you intend to build a retirement corpus the risk-averse way. But you shouldn't ignore other asset classes such as gold and equity among others, in the process of building your retirement portfolio. Generating higher inflation-adjusted returns remains the key to wealth creation in the long term.

Add Comments

Comments
p1tvzoodj@gmail.com Jan 07, 2015 Heck yeah this is exactly what I needed.

 1