Before we get into the nitty-gritty of PF, let us first understand the concept.
So, what exactly is EPF?
Employee’s Provident Fund (EPF) is a retirement benefit scheme that’s available to all salaried employees.
This fund is maintained and overseen by the Employees Provident Fund Organization of India (EPFO) and any company having more than 20 employees is required to register with the EPFO legally.
What Is Provident Fund Deduction?
When one starts working, the employee and the employer will both contribute 12% of the basic salary (plus dearness allowances, if any) into the EPF account of the employee.
The entire 12% of the contribution goes into the EPF account, along with 3.67% (out of 12%) from your employer, while the balance 8.33% from your employer’s side is diverted to the EPS (Employee’s Pension Scheme)
For example: You earn 20,000 a month, you will have to contribute Rs.2400 to your EPF fund. And your employer will have o contribute Rs.734. Which means, every month your EPF account will be credited with Rs.3,134.
These funds are pooled together from crores of employees across the country. This generates an interest which is decided by the government and the central board of trustees.
Existing Rules for Investing
As per the existing pattern, which has been applicable since April 1, 2015, upto 50% of the total PF amount can be invested in government securities. 45% can be invested in debt instruments, 15% in equity and 5% each in money market and infrastructure trusts.
Currently, PF savings of all subscribers are invested in the above prescribed pattern and the subscriber does not have a choice on his/her investment i.e. one cannot customize their portfolio.
PF Subscribers Can Choose Their Investment Instrument for Higher Returns?
Provident Fund subscribers may soon have an opportunity to park their savings in equity, debt or a combination of both as per their choice. The labour ministry is firming up a policy to do away with the existing cap on investments.
The new policy will allow over five crore subscribers of the Employees’ Provident Fund Organization (EPFO) to choose an investment pattern of their own to earn higher returns, much on the lines of the National Pension Scheme (NPS).
(Note: Under the auto choice option of NPS, the aggressive life-cycle fund strategy starts with equity allocation of 75% till 35 years of age and tapers off to 15% by age 55.
The maximum allocation of 75% into equities is for individuals who are less than age 35. For instance, a 45-year-old who opts for an aggressive investment strategy starts with an equity allocation of just 35%)
The options available under the EPF will include government securities, debt instruments, equity investments, money markets and infrastructure investment trusts.
Under NPS, active subscribers are allowed to invest in any of the four schemes in the proportion they want, subject to overall caps.
The labour ministry has prepared a draft policy on investment pattern of EPFO under which it plans to give the subscriber an opportunity to decide where he/she would like to park his/her money.
The investments in EPF could be invested fully in equity, partly in equity, or the entire fund kitty could be put in government securities or debt instruments, depending on the risk appetite of the subscriber.
What are the Benefits of the New EPF Scheme?
The new initiative entails three-fold benefits as discussed below:
- Greater flexibility for subscribers to generate optimum returns;
- Generates returns which are in tune with the National Pension Scheme (NPS);
- Providing long-term sources of funds to productive sectors of the economy
In 2015-16, EPFO invested 5% of its investible deposits, which were subsequently increased to 10% in 2016-17 and 15% in 2017-18.
It has invested Rs. 41,967.51 crore in ETFs and has garnered a return of 17.23% as on 28 February 2018. The body had sold ETFs worth Rs. 2500 crores in March this year for the first time to liquidate its investments in the stock market.
The EPFO’s apex decision-making body, the Central Board of Trustees (CBT), at its meeting held on March 31, 2015, decided to invest only in exchange-traded funds (ETFs) in the category of equity and equity related investments.
EPFO had invested Rs.489.46 billion in ETFs till June 30, 2018. The fund body invests in ETFs, based on Nifty 50, Sensex, Central Public Sector Enterprises (CPSEs), and Bharat 22 indices.
With the new rules being set up, over five crores provident fund subscribers will get the opportunity to fine tune their investments as per their goals.
Disclaimer: The views expressed in this post are that of the author and not those of Groww