It is important to understand that provident fund investment is not just for one year
EMPLOYEES contributing to provident fund witnessed a lot of action regarding the actual rate of interest that will be applicable to them for the financial year 2010-11.
This was earlier announced as 9.5 per cent, after which, there were doubts about getting the central government's permission to pay this rate.
After a lot of confusion, everything has been settled and an announcement has been made that the rate for the financial year 2010-11 will be 9.5 per cent.
Here are some of the aspects that you need to look at:
Actual rate: The actual rate is the final rate that is approved by the central government after the recommendation given by the board of trustees of the Employees' Provident Fund Organisation (EPFO). This is the most crucial aspect, and hence, once the government has officially said the higher rate can be paid then this would be applicable.
The important thing is that this rate will have to be paid to those who are subscribers to the common fund as well as those who contribute to private trusts run by employers so all the employees contributing to the provident fund will be covered.
The other point is that the rate that has been approved is the rate for the financial year only and so the future position also needs to be considered.
Permanence: One aspect that the individual has to take into consideration is that the provident fund investment is not a one year investment. This is meant to be carried on for a longer period wherein the accumulated amount will be available at the time of retirement, so this means that the investor has to take into account the earnings that will flow in the years ahead.
This is the reason why we also need to understand that the higher rate of 9.5 per cent is not a permanent rate but has been raised by an extra one per cent for the year due to the extra reserves that were available for the payout.
The higher rate will be maintained in the coming year only if there are higher earnings by the fund and if this is not present then there is a very good chance that the rate will slip back into the lower zone that was witnessed earlier. Further it has also been clearly mentioned while giving permission for the higher rate that if there is a shortfall in the interest account in the current year for the fund then this would be adjusted in the rate in the coming year.
Future value: Employees have to take into consideration the continuity and the long-term picture.
They should also consider how they could be regular in their efforts that can lead to a disciplined investing.
This route provides tax-free returns and hence an employee has to ensure that he is contributing to the fund and also that he can transfer the amounts to the new employer when he shifts jobs. It is the constant earnings over a period of time and its compounding effect that can help building the required corpus for retirement.
Equity: Permission for investments into equity by the EPFO has not yet been allowed. This impacts the individuals who have invested in the fund because they will not be able to participate in the equity markets through their PF investments.
While there is a lower risk involved with the various safe investments it is also true that the expected return that the investor can earn from the investments will also go down.
This will ensure that there is a lower return that is being generated by the funds and this factor has to be built into the expectations going forward.
