Raise your equity allocation to beat retirement blues, say experts

Keep in mind risk appetite and investment horizon permit

The government recently approved a 40-year low interest rate of 8.1 per cent on Employees’ Provident Fund (EPF) for 2021-22. This will also be the first year when taxation of interest income from contributions above Rs 2.5 lakh kicks in. The return offered by Public Provident Fund (PPF) has also been declining — from 8 per cent in 2018-2019 to present-day 7.1 per cent.

One-year returns from National Pension System (NPS) schemes — both equity and debt — have also shrunk.

All these developments have left investors worried about their retirement savings.

Experts, however, say investors should focus on the long term and not unduly worry about shorter-term developments.

Is EPF rate really low?

While the EPF rate is lower than in the past, it is currently the best fixed-income product.

“The cut in EPF rate should not deter investors. Returns from all debt products are currently low. EPF is still one of the best retirement products. It offers steady returns, safety of corpus, and tax-free withdrawal at maturity,” says Harshad Chetanwala, co-founder, MyWealthGrowth.  

Experts suggest raising exposure to it through Voluntary Provident Fund (VPF).

“While employees typically go for the statutory contribution of 12 per cent of basic pay towards EPF, which is matched by the employer’s contribution, they should also contribute over and above this limit via VPF, which offers the same interest rate as EPF,” says Anil Rego, founder and chief executive officer, Right Horizons.

Your VPF contribution will also earn 8.1 per cent, which will be tax exempt up to a total contribution (EPF plus VPF) of Rs 2.5 lakh in a fiscal year. Interest earned on contributions exceeding this limit will get taxed at slab rate.

Is NPS right for you?

Returns earned by NPS schemes — equity, corporate bond, and government bond — have taken a beating over the past year.

In 2021, their returns were attractive as both equities and bonds were rallying.

“Returns from both asset classes are currently low. But they also offer the opportunity to invest more in equities, which tend to offer better returns over the long term,” says Chetanwala.

NPS also offers an additional tax benefit of Rs 50,000 per fiscal year (besides the Section 80C limit), both when the investment is made individually, or through the employer.

“This additional tax benefit makes NPS a reasonable choice as a retirement product,” says Chetanwala.

Santosh Joseph, founder and managing partner, Germinate Investor Services, however, advises NPS mostly to those who need the additional tax benefit.

“If you don’t need the additional tax benefit, or want a higher-growth portfolio, skip NPS and invest in a well-diversified mutual fund (MF) portfolio,” says Joseph.

Take the equity bet

Provided risk appetite permits, investors should opt for a higher allocation to equities in a long-term portfolio, such as retirement. Equity instruments, including NPS with higher equity exposure, can produce inflation-beating returns.

“Many worry about volatility in equities. The answer is asset allocation. Since retirement planning is usually done over 10-30 years, even an additional 10-20 percentage point allocation to equities can make a significant difference to the final corpus,” says Joseph.

MF options

Those who have considerable time left for retirement should opt for flexi-cap funds and aggressive hybrid MFs. Over the past 10 years, these schemes have given category average returns of 14.3 per cent and 13 per cent, respectively.

“MFs can deliver superior returns over the long term, provided you invest in higher risk-return avenues like equities. Maintain the desired asset allocation through a combination, including equity MFs (via the Systematic Investment Plan mode), debt or hybrid MFs, portfolio management services schemes, PPF, bonds, and annuity plans. Systematic withdrawals from MFs can be an alternative way to generate pension,” says Rego.

Finally, if your retirement is not far away, try to augment your contribution to the retirement portfolio.