If you are a salaried employee and looking for a safe and secure investment with assured returns, then you do not even have to step out of your office.
You can invest in Voluntary Provident Fund (VPF), which gives the same returns as your Employee Provident Fund (EPF) and a tax-free income to boot.
In organisations with more than 20 employees, every month an amount of 12 % of the salary is deducted towards contributions for the Employee Provident Fund (EPF). An equal and matching contribution has to be made by the employer each month.
The VPF is the additional contribution made to the EPF over the mandatory 12% by the employee. Since this is a voluntary contribution, there is no additional contribution by the employer.
The rate of interest for VPFs is the same as EPFs and is 8.75% for the current fiscal, 2014-15. However, interest rates on provident fund schemes is decided by the government every year. VPFs also enjoy Section 80C tax benefits and the interest earned is tax-free.
But bear in mind that VPFs are long-term investments and governed by the same set of rules that are applicable to provident funds. “Maturity returns from EPF/VPF are tax-free provided an employee is in continuous service for more than five years. If the employee has quit before five years and needs maturity amount, it would attract tax,’’ says chartered accountant Rohit Agrawal.
If required, one can take a loan against the amount accumulated in the fund for personal reasons like marriage or buying a house, etc.
A senior manager of a mutual fund who requested anonymity, said, “If you are in the highest tax bracket and considering inflation, then the VPF is the best instrument if you looking for assured returns.’’
However, financial planners do not agree. They feel that investing in VPFs results in locking in a large amount of funds in a single asset class. “Apart from 12% of your salary, the employer too is contributing 12% to the provident fund. Why should you invest additional money for a long period into an investment that will not grow in value? You are restricting your return to 8.75%,’’ says Hemant Rustogi, CEO, Wiseinvest Advisors.
Instead financial planners would suggest that you diversify your investments (see chart). “One should use other options available in the market which might be suitable for specific individuals,’’ says Arnav Pandya, certified financial planner and financial advisor.
“If you are investing for the long term, it is better to invest in equities which provides you liquidity as well as the chances of an upside,’’ says Rustogi.
But for the risk-averse investor, VPF is an ideal investment option. For those of you, who do not manage your portfolios actively and are looking for assured returns, VPF is the answer to most of your investment hassles. “The special advantage of investing in the VPF is that no additional investment gets created as it just adds to the EPF making it easier to monitor,’’ says Pandya.
Investing in VPFs is relatively easier as all you need to do is to inform your office to deduct a particular amount from your salary every month. Thus, the VPF almost works like a monthly systematic investment plan (SIP) without the additional headache of filling forms or going to the post office to make a deposit.
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