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How EPFO ruined your retirement savings

Notwithstanding the recent EPFO decision to invest 5% of future contributions into stocks, the inexplicable delay in arriving at a consensus has come at the cost of spoiling your retirement party that the stock market could have gainfully sponsored.

June 17, 2015 10:14 IST | India Infoline News Service
If you were told that Employee Provident Fund Organization (EPFO) till date has not done justice to your retirement funds and plans, it’s quite possible you would find it hard to believe. You are not to blame and you are not alone. Notwithstanding the recent EPFO decision to invest 5% of future contributions into stocks, the inexplicable delay in arriving at a consensus has come at the cost of spoiling your retirement party that the stock market could have gainfully sponsored. To put in explicit terms, your retirement savings have missed the 700% growth rise in Sensex over the past 20 years.
 
Let’s take a closer look at the damage through a hypothetical example. If an individual named Mr. Left Behind would have put in Rs. 2,000 per month in EPF for 20 years, the corpus today would have grown to Rs. 29.35 lakh. At 9% returns, assuming 6% inflation every year, he could sustain himself for a little over nine years. Even if 5% of his monthly contributions were to go into stocks, the amount would increase only by Rs. 70,517 to touch Rs. 31.05 lakh. Not impressed? You shouldn’t be!
 
The culprit behind the marginal growth is the fact that EPF offered sky high rates only in the past. From 12% between 1995 and 2001, it dropped to 8.5% in 2005 and has stayed put at that rate ever since. 5% put in stocks fetched a mere 2.4% in return, but a 50% investment would have reaped in Rs. 36.40 lakh, a RoI of almost 36,000 every month for 10 years, instead of 25,000 per month.
 
Further, Instead of investing 5% in Nifty, had Mr. Left Behind preferred an actively managed and diversified equity fund, the corpus could have been more than 10% (as against the mere 2.4%). Change the investment to 50% (ceiling for stocks within the NPA sector) and Mr. Left Behind would more than doubled his EPFO proceeds (Rs 59.69 lakh)! But EPFO didn’t let that happen – it left Mr. Left Behind with a fate that did justice only to his name.
 
So what does Mr. Left Behind’s example teach us? If you are in your 20s and 30s, don’t allocate small sums into stocks. If you are thinking long run, say a 15-20 years timeframe, plan for higher investment in stocks to reap significant returns.  

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