Relying only on your EPF for your retirement? You better not!
If you are a salaried person, you would be contributing a part of your salary mandatorily towards the Employees’ Provident Fund (EPF), which is considered a traditional tool for saving for retirement. However, if you are assuming that the EPF corpus you have been building would be enough to meet your retirement needs, you may be mistaken.
Given the tax efficiency, EPF is certainly a good investment product. EPF enjoys the EEE (exempt-exempt-exempt) tax regime, which means it is tax-free at the three stages of contribution, interest amount accrual and withdrawal. It’s a government-backed scheme, which makes it a safe instrument.
However, EPF if primarily a debt product and the limited exposure to equity and caps on investment it has may not help you accumulate the required retirement corpus.
Where does EPF invest?
In 2015, the Employees’ Provident Fund Organisation (EPFO) started investing in equities. Initially, it was given a go-ahead to invest 5% of the incremental corpus in equities; the limit was increased to 15% in 2017. EPFO invests in exchange-traded funds (ETFs), including Central Public Sector Enterprises (CPSE) ETF and Bharat 22 ETF.
However, EPF’s equity exposure is very limited, due to which it may be difficult for the instrument to generate inflation-beating returns. Plus, in line with the declining interest rate in the country, EPFO has lowered the rate of interest for FY22 to 8.1% from 8.5%.
A small investment:
Apart from the concern about lower equity exposure, limited contribution towards EPF is another cause for worry. Both employees and employers contribute 12% each to EPF on a monthly basis. However, in case the employee’s salary is above ₹15,000, it is not mandatory for the employer to contribute 12% of the actual salary (basic plus dearness allowance). They can limit the contribution to 12% of ₹15,000 which is ₹1,800. Therefore, irrespective of the employee’s salary level, the employer’s contribution may be limited to a lower level.
Also, keep in mind that 8.33% of the employer’s contribution will go towards EPS (Employees’ Pension Scheme), which will not earn a single penny of interest.
Conclusion?
When building a retirement kitty, include equity-oriented products such as mutual funds of the relevant category. However, how much equity exposure you should have will depend on your risk appetite.
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