EPF investing in equities may be soon over

Employee Provident Fund is best retirement plans that every employee must opt for. It helps individual to build up big corpus to be used in post retirement. Features like fixed returns and taxability also makes investment options. Following are some basic rules that every employee must look for.
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EPFO allotting units from Corpus

Recent years, Employees Provident Fund Organization has been attractive this exposure to equities. This year it will invest 15 per cent of its corpus in this asset and rest in fixed income. Now, EPFO is allotting units to you from your corpus invested in equities. There are plans to allow high proportion of your EPF corpus in equities. Central Board of Trustees (CBT) will accept these applications. You need to understand EPF suggestion of these changes on fixed return products.

EPFO investing in Equities

Apart from about EPFO has been investing in equities from two years but there is no agreement on how gains from this will be passed on to you. Now, it has decided this will be done by allocating units to each subscriber.

Check app to settle EPFO claims

Depending on your equity balance total value of ex-change traded funds that EPFO holds. And it will allocate units at end of every year to each individual and also this will reflected in your account statement.

Fixed Return on income

When you want to withdraw your money then EPFO will like to redeem units based on your value on that day. If you have not handed over ETF units because you need to have demat account. This will be an accounting entry and unitisation is expected.
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You cannot keep giving fixed return in product where you have an allocation of 15 per cent to equities in underlying portfolio whose return can be volatile. At some point this can give you serious problem. With this change EPFO can continue to give fixed return on fixed income (85 per cent), while allowing you to bear up and down on equity see.

Advantages and disadvantages

This development will have both positive and negative implications. Key positive is that you will now become part of owner of corpus that EPFO has invested in ETFs. EPFO announces every year for 85 per cent fixed income investment is to drop. Since gains from equities will no longer added to that rate. But it will help you to earn high rate of return from their EPF corpus.

With allocation of corpus to equities you can earn high returns. At same time, high volatile can make your EPF value will fall. While equity returns are higher than bond returns for long term and they can vary from year to year.  In addition, guaranteed return product is converted into market linked products. If you are approaching to retirement you can face an issue.

To know about EPF ECR you read one more article on EPF Electronic Challan cum Return

Normally, you get close to retirement financial advisor recommend to shift from equities to debt. This ensures in equities market does not affect corpus. If EPFO follows fixed 85.15 allocations to debt and equities can give problem. EPFO has allowing you to delay encashment of units on retirement to deal with this risk.

Higher allocation to equities

EPFO is has option to invest higher proportion of your corpus in equities. EPF investments have long term they will able to ride out interim volatility of equities and you can earn high returns. You can avoid raising your equity allocation above minimum level.

Finally, these changes means passive investment in EPF are over. You will have to take decisions regarding how much to allocate to equities to withdraw units at time of retirement or wait for market conditions to improve and so on. All this will call for some financial knowledge.

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