If the falling interest rates on provident fund (PF) have been a cause of concern for you, then brace for a fall in the EPF rates again. For, retirement fund body EPFO is likely to lower interest rate on PF deposits for 2017-18 compared to 8.65% provided to its 4.5 crore members for 2016-17, a labour ministry official has said. EPFO may cut rate of return on PF deposits owing to lower income on bonds and its plan to credit ETF investments directly into the account of subscribers.
Earlier on Thursday, EPFO had approved an accounting policy for valuation and accounting of equity investments which was prepared in consultancy with IIM Bangalore. “The policy will enable the body to credit ETFs units into the provident fund account of the subscribers by this fiscal end. Thus, every account holder will see their provident fund balance in the form of cash balance and ETF units,” said a PTI report.
Although the dividends on ETFs will be credited into the subscribers’ account, but the members would be able to realise the entire rate of return on these equity-linked investments at the time of withdrawals. The subscribers will also have the option to withdraw money while taking advances from their accounts, either by liquidating ETF units or from cash component.
Whatever be the case, the fact remains that you are likely to earn less from your EPF deposits in the near term or in this falling interest rate scenario at least. So, what to do?
Financial experts are of the view that if the rate of return on EPFO comes down, it would be a necessary though an unpopular move. Necessary because avenues like GOI Bonds and various state government and public sector debt instruments in which the EPFO has to compulsorily invest more than 80% of its incremental inflows, are offering interest rates of less than 8%.
“Hence though unpopular, it is a necessary step for the long-term health of this organisation. The impact on existing holders of EPFO would be negative as their returns would decrease. Logically new investors should get deterred by this expected fall in the guaranteed return. However, the impact would not be so severe as there are very few guaranteed investment options available in the market now. Moreover, these fixed return options as well as fixed deposits offer much lower interest compared to what the EPFO is offering now or even what it will offer after the expected interest rate cut. Hence, though a negative development, if it happens, but unlikely to cause any significant damage to the attractiveness or inflows into the EPFO,” says Ashish Kapur, CEO, Invest Shoppe India Ltd.
Whatever be the case, it is clear that slowly EPFO returns will get aligned to the market rates. “The Finance Ministry has already given its view to EPFO that its interest rate should be aligned with the rates of small savings schemes like PPF. Keeping in view the thrust of the government on reducing its liabilities by linking all investment rates to those actually earned from the market, EPFO subscribers should be ready for this change. Corporates will also look at NPS for their employees if EPFO does become variable. Since EPF is considered a long-term investment, EPF subscribers should simultaneously look at alternative options like mutual funds for long-term accumulation,” suggests Jitendra P S Solanki, MCSI, CTEP, CFP and Financial Planner for Special Needs Dependent Family.
Thus, although PPF still remains one of the best and trustworthy investment options for accumulating your nest egg, the falling interest rates may erode your gains. Therefore, investing some money in more profitable investment avenues like MF or NPS will not only take care of any cut in interest rates, but will also boost your portfolio in the long run.