EPF, post this reduction also delivers an attractive pre-tax return of around 11%-12% as compared to other debt instruments available in the market and also, the recent raise in withdrawal limit to age 70 makes it a preferred choice
There is a dearth of statutory retirement savings products in India where somebody can preserve their wealth for accumulation and ensure regular stream of income, post retirement. In a recent announcement, interest rate cut of 15 basis points (bps) to 8.65% in savings by the Employees' Provident Fund Organisation (EPFO).
Despite reduction in interest rates, EPF still remains an attractive investment for retirement planning as both employer and employee can contribute as a part of their savings monthly and can help in accumulating a large corpus at retirement. For example, if an investor contributes Rs 15000 per month for 10 years, he would create a corpus of Rs 28.45 lakh, which could be a part of his retirement portfolio. EPF, post this reduction also delivers an attractive pre-tax return of around 11%-12% as compared to other debt instruments available in the market and also, the recent raise in withdrawal limit to age 70 makes it a preferred choice.
The current fixed income landscape post demonetization suggests that there is stressed liquidity situation in the economy, which can affect the growth rate. Hence, I believe that repo rate will come down by 50-75 bps in the next nine months and CPI inflation would remain at 4.25% in next quarter. The current landscape is positive on duration strategy as well as corporate bonds as interest rates will move southwards.
Investing in National Pension System (NPS) is also a good strategy for investors with the launch of two new life cycle funds. LC-75 and LC-25 have given the investor the extra edge as compared to investments in EPF as LC-75 fund can invest 75% in equity. The corporate debt plan of NPS has delivered a category annualised return of 11-11.5% in last 5 years. While other debt products like mutual fund FMP's (fixed maturity plan) and accrual funds can also be looked at.
FMP's are closed-ended debt mutual funds. They invest in securities whose duration is similar to its own underlining assets; this is done to eliminate the risk of interest rate fluctuations. On the other hand, Accrual funds focus on earning interest income from the coupon offered by bonds. Accrual funds are best suited for investors who wish to see very little volatility in their debt portfolio and desire stable returns.
Important concepts like Power of 7 and Regret of 5 needs to be understood wherein importance of how extra 7% annualised returns can significantly add to wealth creation and delay of five years can reduce your corpus by half in more than 10-year investment horizon.
Familiarity bias is a common bias seen among investors based on their familiarity with asset classes. Generally, due to high familiarity with fixed deposits and real estate, people tend to prefer them while equity as a long-term asset is ignored. Ideally, contribution towards retirement savings should be around 20% of your take home pay and could be diversified among EPF, NPS and equity mutual funds to ensure benefits of compounding and achieving adequate corpus at retirement.
The writer is founder & CEO, TBNG Capital Advisers Pvt Ltd
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FMP's are closed-ended debt mutual funds. They invest in securities whose duration is similar to its own underlining assets; this is done to eliminate the risk of interest rate fluctuations. On the other hand, Accrual funds focus on earning interest income from the coupon offered by bonds. Accrual funds are best suited for investors who wish to see very little volatility in their debt portfolio and desire stable returns.
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