EMPLOYEE PROVIDENT FUND AS INVESTMENT
Employee provident fund is managed by EPFO (Employee provident fund organization) formed in the year 1952. The organization assists under the governance of the Ministry of Labour and Employment, Government of India.
An employer with more than 20 employees is entitled to provide an equal share of Provident fund as employee deposits whose salary is higher than Rs. 15000 per month.
Employee provident fund is paid as 12% of basic pay of every employee and the same amount is paid by the employer in two splits, EPF and EPS (Employee Pension Scheme)
In this topic, I will not be taking through the process or the history of EPF. Will discuss on how we can have this as an investment tool and how to link your goals towards EPF.
THE BENEFITS OF EPF:
· EPF is like an investment which has a long runway.
· The investment starts at your younger age, when you really don’t know.
· Even for many people, EPF will still remain as the only investment they should have done.
· Many employees don’t have an idea of the interest rate they get from the provident funds.
· The current interest rate is 8.5%, earlier it was at 8.65%.
· This is the highest interest paid by any government-oriented deposits.
· The highest interest paid was 12% per annum during the period of 1989 to 2001.
In the above picture of historical EPFinterest rate, you find how the interest rates have seen a fluctuation from 3% to 12% then to 8% then again back to 8.5%. There is always some fluctuation in all types of investment and savings.
MAJOR MISTAKE BY EPF MEMBERS:
· The first mistake of the EPF holder is not aware of the interest rate they provide
· Then, Withdrawing the complete funds while changing the company. Instead, you can transfer the securities.
· Withdrawing the amount whenever an emergency falls in. Instead of withdrawing from EPF, try to build an emergency fund.
· There are people, who withdraw to buy some liabilities like mobile, bike, appliances, etc.
· People don’t know the power of compounding. In EPF, the compounding effect works in a perfect way as the runway is long. Some people will work for 60 years. So, the runway will be almost 35-40 years.
EPFO always delays in the payment of interest into your PF passbook. But, they have to pay you the complete interest rate while you close the account.
If you need to withdraw the amount, the only reason should be investing equity. Since equity is the instrument which provide an average of 12-14% per year for these long runs.
EMPLOYEE PROVIDENT FUND TOWARDS GOAL:
There are many goals that need a long tenure of nearly 20 – 30 years. The most important two goals are retirement and Dream home.
The goals can vary from individuals, but retirement funds can be a perfect goal to achieve with employee provident fund.
Let us assume when an individual starts their career with basic pay of Rs. 7000 per month, the PF from the employee side will be 600 and the employer pays another 840. So, a total of 1680 every month.
At the back of mind, the individual receives a minimum of 5% hike in salary every year. They will be associated with the job for the next 30 years.
We will take an average interest rate by the government every year. Let it be 8.5% (current rate).
Tenure – 30 years
Initial Deposit – 1680 per month
Yearly hike – 5%
Interest rate – 8.5%
The total corpus at the time of retirement will be 46.03 lakhs and the total invested is 13.36 lakhs. Almost more than 3 times of the amount deposited. Actually, the amount you deposit will be 6.68 lakhs.
So, after retirement. The corpus of 46 lakhs is deposited in low-risk FD, with the facility of every year interest to be paid back for survival. The FD offers an interest rate of 6%
So, every year the interest paid out will be around 2.7 lakhs every year. Rs. 23015 per month.
This is how you have to plan your EPF as an investment and allocate towards your retirement.
· Employee provident the fund is the only instrument, where the government currently pays the highest interest.
· EPF should not be withdrawn for your emergencies. This saving has a compound effect on it.
· The current interest rate is 8.5%, but at highest GOI has offered at 12%.
· Plan your EPF amount towards a goal, the corpus you earn will be nearly 6 times more than your invested amount.