Despite interest rate cut, EPF most attractive on fixed income avenue
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.