In November 2017, the Employees' Provident Fund Organisation (EPFO) trustees will convene to decide the EPF interest rate for 2017-18. After achieving a 5-year high of 8.80% in 2015-16, the EPF interest rate was cut to 8.65% for FY 2016-17. This tracked the declining yield of Government Securities (G-Sec).
In 2016, the 10-year benchmark G-Sec yield fell from 7.8% in January to 6.8% in October, before the radical demonetisation move of the Government. Due to excess liquidity spurred on by the note ban, yields fell to a low of 6.2% in November 2016. It wasn’t long before the yield started rising again. As on October 30, 2017, the benchmark yield is back at the pre-demonetisation level of 6.8%.
The current gap between the EPF interest rate and G-Sec yield is significantly high at 185 basis points.
Notice in the chart above, the wide gap in interest rates has often been reduced. Currently, the gap levels at 85 basis points (bps).
At present, apart from special schemes that pay an interest of 8.3% such as the Sukanya Samriddhi Account Scheme and the Senior Citizens Savings Scheme, all the other small savings schemes offer an interest rate under 8%.
Given the 15% of incremental investments in equity ETFs under EPF, the market rally of the past year, may give a fillip to the EPF interest rates. But, going by the movement on interest rates on similar fixed income products, it is highly likely that the EPFO trustees may reduce the EPF interest rate for FY2017-18.
This means your retirement corpus will earn a lower return going ahead.
Even though your mandatory contribution grows at a slower rate, the important realisation is that the EPF must not be viewed as a standalone retirement product. With growing inflation and everyday expenses, you simply cannot depend on your EPF corpus for retirement. Hence, there is a need to build your retirement corpus through other wealth creating products.
The biggest advantage of investing in EPF and/or PPF has been their favourable tax status. Investors get tax benefits on the amount they deposit and the amount they withdraw along with tax-free interest that accrues on their investments. However, the interest rate earned, though tax-free, may not be sufficient to build a sustainable retirement corpus.
EPF or PPF can be one of the options you may consider when building a retirement fund. This will create a debt-exposure in your portfolio. But when building your retirement portfolio, allocate proportionally to other asset classes such as equity. Our research indicates investing in equity is known
to have generated high inflation-adjusted returns leading to long-term wealth creation.
Planning for retirement can keep you financially independent even during your golden years.
When you are retired, this will supplement your income to take care of day-to-day expenses and any medical emergencies. It is important to have a comprehensive retirement amount in mind that you need to live comfortably in the second innings of your life. To arrive at a hypothetical corpus amount, you must thoughtfully consider certain estimations and presumptions.
Use our simple Retirement Calculator here, to estimate the corpus you require at the time of retirement. In addition to this, you can calculate the investment amount needed to achieve this retirement goal. Our comprehensive Retirement Calculator is simple to use and will make an accurate estimate of your retirement needs. You can then create a financial plan based on this calculated information to create your nest egg.
The right mix of assets and a disciplined investment approach will help you build your retirement savings.
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