EPF (Employees’ Provident Fund) is considered to be a secure post-retirement fund for taxpayers. With the capital market expected to incorporate a policy rate cut, interest rates are expected to fall, bringing about a steep drop in EPF. Therefore, it is highly unlikely that the EPF will be able to maintain the previous year’s rate of interest. Among finance professionals, financial advisers, mutual fund managers, and investment analysts, 84% of them are expecting that the EPF rate may be lower this year. The EPFO started investing in equity ETF (Exchange Traded Funds) from last year in order to improve returns, however the allocation were too minor to bring about a substantial change to the overall returns.
The Government feels otherwise as investment in equity is expected to deliver positive results in the long run. The most important thing when investing in equity is to give it time to deliver results. Financial experts are backing this view as globally, around 30% of retirement savings are being invested in equity. Another important thing to remember is that out of Rs.9,500 crore EPF inflow every month, only about Rs.475 crore is invested into equity.
Problem of evaluation
Amid the debate of how much to be investment in equities, there are bigger issues arising. According to financial experts, there is a huge flaw in the way EPFO is valuing the equity investments. Till the time the investment was being made in bonds and deposits, it was fairly simple to value the EPF portfolio. The calculation was based on the face value of the bonds and the interest was then credited to the PF accounts of members.
Returns from NPS:
While EPF is unsure of its returns and accounting, the NPS (New Pension System) is generating double digit returns for investors. Workers in the government sector have made 11% compounded profit in the past five years, and more than 14% in the last three years. Investors who have aggressively invested in NPD have gained the most.
EPF to NPS?
There are two ways of looking at whether or not you should shift your retirement fund from EPF to NPS. Experts feel that while market-linked returns, flexibility, and transparency are the positive factors, negative factors are tax on maturity and compulsory annuity. The Government is trying its best to make NPS more lucrative to investors. Last year, it saw an announcement of additional tax benefit on NPS investments, this year the deal was enhanced by making 40% of the NPS corpus tax-free on its maturity. EPF subscribers can easily shift to the NPS, however the employee is given a single chance to return to EPF if he or she desires.
Since August 2015, the EPFO has made an investment of approximately Rs.7,500 crore in equity ETFs and has gone up to Rs.8,500 crore, which makes an absolute return of 12%. However, the CBT (Central Board of Trustees) are strongly opposing the move towards equity investment. The CBT believes it is not a good idea to invest workers’ savings in such risky instruments as they are speculative.