Higher EPF rate and its challenges for MFs, other savings schemes

THE interest rate on the employees' provident fund (EPF) has been raised to 9.5 per cent for the present financial year. This is good news for all those who have money invested into EPF, as the new rate represents a rise from the returns witnessed in the past few years.

There is also some indirect impact that this rate hike will have on the individual and their efforts while making other investments. This is one aspect that assumes added importance as several people might miss out on the details here.

Restriction and impact: The higher rate of return of 9.5 per cent is applicable for the existing investors of the EPF. This system comprises a compulsory contribution that is made each month by the employer and the employee to the provident fund based upon a specified percentage of the salary earned.

The interest is earned on the entire amount present in the fund that includes the present year's contributions plus the accumulated amount comprising past contributions and the interest earned on it.

There is a downside to the entire process, since this is accessible only for employees it keeps out others including professionals or those who are self employed from getting the benefits. On their part, the EPF investors have to understand two important points. The first is that the contribution is

meant to build a corpus for retirement and the second is that the rates are announced each year. So, there is no surety about the figure being maintained over a period of time and hence, they need to take things as they come.

 

Comparison:

 

The raising of the rate of return to 9.5 per cent has increased the visibility of the EPF in the minds of investors. The rate has become a reference point for their investments.

Most of the small savings option that are present in the market are earning a return

of around 8 per cent, while other debt avenues such as bank fixed deposits are even lower. The raising of the return here also means a challenge for other areas like monthly income plans of mutual funds and the new pension scheme because investors will scrutinise their performance closely.

While there might not be direct movement of money from one area to the other because of investment restrictions there can be some other implications. So, for example, when this kind of higher rate is known then there are bound to be questions as to why other routes are not earning a higher rate of return. This can also lead to blurring of the risk reward situation because options like monthly income plans of mutual funds and some options in the new pension scheme might end up with higher or similar returns but there is an added risk element due to the presence of equity in the portfolio. If the risk element is ignored, then there can be severe repercussions in case of tough times.

 

Restriction:

 

Individual investors might also feel a bit frustrated because even when they see high returns in front of their eyes they might not be able to access it. First, it is only employees who will be benefiting directly from the move of the higher rates.

Those who are not employees or salaried would not have an option of investing here. The alternative is to go towards something like the public provident fund but the rate here is 8 per cent or to the new pension scheme where anyone can invest.

Another point that salaried individuals also need to know before they calculate their gains from the fund is that one should not consider the comparison on a year-to-year basis. This change is necessary because this is a long-term investment meant for the purpose of retirement and hence, a short-term rise in performance might not make much of an impact. The other thing is that they must also realise that the amounts that they put here will not be accessible easily till retirement.
So, they should consider the long-term implication of the benefits.

Taxable nature:

 

The most important point as far as the individual is concerned is the net return that they get in their hands. This is the figure that they end up with after all the deductions on account of taxation. This is one area where the provident fund scores because the return earned here is tax-free. This is a very important point because it raises the post tax rate of return for the individual, which is going to be very difficult to match in other areas.

Other areas such as pension funds and long-term debt options have a return that is taxable. So, for someone who is falling in the higher tax bracket, they could find themselves ending up with a lower return on the net scale. This can be a depressing though because the returns are being eaten up by taxation is never preferable. This is the reason why the individual should be looking at the various options also from the net tax angle as it will ensure that there is a higher amount coming in for them.