 "EPFO")
For the past few months, several reports have suggested that rates of the Employee Provident Fund (EPFO) are likely to come down. While some reports have based their analysis on falling yield on 10-benchmark bond yields, down at 6.4%. And while a small 5% of the incremental corpus is being invested in equities, returns are unlikely to be great because the Sensex has returned just 6.44% in the past year and in the near-term, say three months’, returns are down 5.80%. And at a dismal 5% allocation, overall returns will hardly be impacted.
Some others have based their analysis on the falling small savings rates where one- and five-year term deposit rates were cut to 7.1% and 7.8% respectively. Some small savings instruments still give good rates like the Public Provident Fund at 8.10% and Sukanya Samriddhi Account Child Scheme at 8.6%.
But despite this apprehension from analysts, investors in the EPFO should remember one thing – even if the rates are cut marginally, they are still a good 100-150 basis points more than fixed deposit rates. That is, State Bank of India, the country’s largest bank, is 7% for its one-year fixed deposits and 6.5% for 5-10-year tenure. The gap between EPFO and SBI’s one- and 10-year rates currently stand at a good 180 basis points and 230 basis points rerspectively, something which will translate into a significant amount over the longer term.
For the sake of simple calculation, if a risk-averse investor puts Rs 1 lakh in EPFO (without considering annual investments in EPFO) even at a lower rate of 8.5%, after ten years the amount would become Rs 2.26 lakh. In a ten-year SBI fixed deposit, paying 6.5%, the returns would be Rs 1.87 lakh – the difference would be Rs 39,000.
Of course, debt funds can be a good option. And they are offering remarkable rates in the current year due to falling interest rates. For example: Gilt medium-and long-term and dynamic bond funds have returned 16.36% and 14.07% respectively. But before you jump to invest aggressively in debt funds, remember that they are riskier in nature. It’s a good time to shift your fresh fixed deposit investments to debt funds. Don’t bother too much about EPFO returns.
