You must be well familiar with the term EPF popularly called “Employee Provident Fund”. The Employee Provident Fund is managed by an organization called Employees Provident Fund Organization (EPFO). Under the EPF scheme, you (employee) will make a certain contribution towards the scheme. Your employer makes an equal contribution (contributes the same amount as you have contributed), to this account. This account is maintained by the EPFO.
A small portion of your employer’s contribution, goes to an account maintained in your name, called employee pension Scheme (EPS). Only your employer makes a contribution to the EPS. EPFO had started investing money in stocks in August 2015. EPFO invests in equities through ETF (Exchange Traded Funds). EPFO has invested in ETF's run by the SBI Mutual Fund, UTI Mutual Fund and the central public sector enterprises ETF run by Reliance Mutual Fund.
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So why is EPFO investing your money in stocks? EPFO invests 15% of its annual incremental corpus which is around INR 1.4 Lakh Crores in stocks through ETF's, to get higher returns through equities. Now, you and other subscribers of the EPFO can get part of your retirement money in the form of units which would be proportional to the money, EPFO invests in equities.
You will soon be able to check the status of your investment in the EPF in debt and equity based units.
About 85% of your contribution in the EPF will give you interest as declared by the EPFO. EPFO declared an interest rate of 8.75% in FY 2015, 8.8% in FY 2016 and 8.65% in FY 2017. About 15% of your EPF contribution has been invested in equities which will be converted into units and then allotted to you and other subscribers.
You can encash these units when you withdraw your money. You can even postpone withdrawal if you feel you will get better returns.
So what does all this mean? You and other subscribers will get 2 sets of returns. Around 85% of your investment in the EPF will give you interest as declared by the EPFO. The remaining 15% will follow the mutual fund model where your money is invested in equity through ETF's.
SEE ALSO: EPFO invests in stocks- Is it good?
EPFO started investing part of your money in equities way back in August 2015. In over 2 years since EPFO began investing in equities through ETFs, the cumulative return on EPFO’s investment in equity was 13.72%. This is a very good return in a falling interest rate regime. The EPFO also earns dividends annually through its equity investments, which will be distributed to you and over 4 Crore subscribers giving you higher returns.
When you withdraw your money from the EPF, 85% of your investment is given to you along with the rate of interest declared by the EPFO. The remaining 15% is paid to you by multiplying the units accumulated with the value of equity (collective investment in the ETF) on the particular day. If you feel you get better returns by postponing your EPF withdrawal, you can do so by about 1-2 years. Your EPF withdrawals are also tax free.
EPFO invests your money in equities for the long term. Equities are known to give good returns over 3-5 years. By staying invested for the long term in equities, EPFO is following the right path to investing in equity and giving good returns to you and other investors.
SEE ALSO: 5 New Steps Taken By The EPFO
The EPFO investment in equity has one weakness. There is no exit policy guiding its exit from the equity investment. Simply speaking, EPFO has not decided when to exit from the stock market. Trade Unions attacked the EPFO on the absence of a selloff policy and also stated that returns are not guaranteed. EPFO is looking to address these issues and the CBT has allowed the EPFO to exit the market when the fund managers feel that they need to take the money off the stock market. Be Wise, Get Rich.
Mr. C S Sudheer is the founder and CEO of IndianMoney.com – India’s largest Financial Education Company. He started his career with ICICI Prudential Life Insurance and later on worked with Howden India. After his brief stint in Howden India, he moved on and incorporated Suvision Holdings Pvt Ltd which is the sole promoter of IndianMoney.com. He aims to build a nation that is financially literate with investment savvy citizens.
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