EPFO has recently reduced the interest rates to 8.1 percent. This is the lowest in 43 years. These reductions in the interest rates of the pension fund have a negative effect on the growth of the retirement fund.
EPFO recently reduced the interest rates to 8.1 percent. This is the lowest interest rate of the pension fund in 43 years. Despite this, EPF remains the most preferred investment option.
Investonline.in founder Abhinav Angirish says that due to market conditions and pressure on interest rates, the Central Board of Trustees of the Employees’ Provident Fund Organization (EPFO) has proposed to reduce interest rates.
These reductions in pension fund interest rates have a negative impact on the growth of retirement funds, while inflation further reduces the actual returns.
Besides, the decision has come at a time when interest rates on similar products like Public Provident Fund (PPF) and other securities are due to economic contraction, lower yield on government securities and fixed deposits, he said.
Employee provident fund deposits now offer lower interest rates, which suggests the need for retirement planning for salaried employees early in their careers and prompts them to consider diversifying their investment portfolio.
Compounding works wonders for saving money and can also reduce the effect of diminishing returns to a great extent.
NPS is a better option
He explained that due to the reduction in interest rates, the National Pension System (NPS) has emerged as an option for creation of retirement corpus. This is the table for NPS Tier-1 returns on Corporate, Alternative Asset, Government and Equity asset classes for 1-Year, 5-Year and 10-Year returns respectively.
“Essentially the previous rates were volatile. This will make the employees realize that they cannot fully depend on their EPF. They will be encouraged to invest in a more diversified portfolio including options like NPS and mutual funds,” he said.
There is a growing awareness of NPS among a growing number of individuals. In the most recent data provided by the Pension Fund Regulatory and Development Authority (PFRDA),
NPS subscribers registered a jump of 22.31 per cent to over 50.72 million by the end of February. Reached out to the subscribers. It shows that people are looking at retirement options.”
Why EPF is popular
He further said that although EPF is not as popular as before, it will remain one of the most attractive retirement saving vehicle. The main reason for this is the tax efficiency at all stages of contribution, investment, accumulation and maturity. EPF is still a popular option for most of the customers. Given below is a chart of returns for 3-5 years for different asset classes.
Angirish said, “If you are very far from retirement, then you should focus on equities in your retirement portfolio. Alternatively, you can use NPS, where you can invest up to 75 per cent in equities (depending on your risk appetite).
Additionally, actively managed and passively managed equity mutual funds are the best options available to generate good returns in the long run. Over the term, equity investments give better returns than fixed income instruments, even if they are volatile in the short run.”
Take advice from a financial advisor
He said that the best approach is to allocate a certain percentage of your portfolio in the sources of income. For example between 10 and 20 per cent. EPF and PPF are among the most popular forms of retirement savings options.
Make sure that you do not allocate more in EPF just because it is backed by the government and is completely safe.
If you invest more in EPF, you will not be left with enough money for equity. It is an asset class that has the potential to beat inflation and help you retire with a sizable chunk of cash on retirement. Ideally, you should seek the advice of a qualified financial advisor, who will understand your risk profile and suggest the most suitable investment for you.
