Behavioural biases that damage your investments!

Over 5 crore person already invested and getting good returns. When discussing about safe investments for the future, one generally refers to Public Provident Fund (PPF). But there is another instrument that gives us an interest rate 140 basis points higher than that of PPF.

This is called Employee Provident Fund or EPF. It is the only instrument through which one can get 8.5% interest, which is the highest among all the savings instruments.

EPFO
Employees’ provident fund or EPF is managed by Employees’ Provident Fund Organisation. Here employee and employer both contribute the same amount.

An amount equivalent to 12% of the basic salary of the employee is deducted and deposited into the EPF account along with a matching contribution from the employer. Therefore, the total contribution is 24% of the employee’s basic salary.

Consider a person’s basic salary is Rs 10,000. Then the employee and employer contribution would be Rs 1,200 each i.e. Rs 2,400 per month.

The amount saved in the EPF account can be withdrawn at the time of retirement, or during periods of unemployment, or any other emergency use.

You can withdraw your EPF amount as and when you need it for meeting personal requirements such as marriage of a child or meeting education expenses.

EPFO have a tax benefit under 80C section of IT Act.

The Return
The Central Board of Trustees of Employees’ Provident Fund Organisation (EPFO) has recommended 8.50% annual rate of interest to be credited to EPF subscriber’s accounts for the financial year 2020-21.

EPFO has more than 5.5 crore active subscribers.

For 2019-20, EPFO offered an interest rate of 8.50% and in 2018-19 it was 8.65%.

EPF vs PPF
Financial advisers say EPF is always a better option. In PPF you contribute alone but in EPF both employee and employer contribute the same amount.

EPF offers a higher interest rate. Both have tax benefits.

Funds can be withdrawn from both for emergency purposes.

In EPF the employee would get a lump sum amount at retirement, which includes the contributions of both the employee and the employer with the interest payments. Besides he/she get some pension also.

The entire 12% of the employer contribution does not go to the EPF account. Out of the 12% contribution, 8.33% goes towards the Employee Pension Scheme Account, and the remaining 3.67% goes to the employee EPF account.

Whereas in PPF the person might get full amount along with the interest, once the scheme got over at 60 years or before that.

The numbers
If we consider a person contributing Rs 3,000 every month from the age of 25 years and making no withdrawal, then at the present rate of 7.1%, PPF will offer Rs 56 lakh when he turns 60.

On the other hand, consider a person to earn a basic salary of Rs 10,000 at the age of 25. Then the person will get about Rs 41 lakh at the end of his job life, provided the interest rate of EPF and basic salary should be at the same level, though this is impossible in real life.

In real the amount would be much higher what is projected here. Experts feel in real term EPF return would definitely surpassed the PPF return.

Expert take
“PPF and EPF are both very important for a salaried middle-class person. Both the instruments have their own advantages. I think a person should opt for both to get optimum returns,” said Arvind Agarwal, IT consultant.

“EPF is a great instrument, so is PPF. EPF interest rate is the highest. PPF, too, helps one secure his/her future as well. So one should utilise both options,” said Subhasish Roy, deputy secretary general MCC chamber of commerce.