Tuesday, December 27, 2016

Will Provident Fund Help Your Needs Post Retirement?

Will Provident Fund Help Your Needs Post Retirement?

We start earning at the beginning of our 20's and spend a part of it for our current needs. Some amount of money will be invested or move it into savings account. For savings or investing the money, we have many options in today's world. The one who is in a permanent job mainly chose to have faith on Provident Fund only.

In the financial year 2015-2016, PF gave interest at the rate of 8.8%. In the current financial year, it is expected that the interest rate for PF will decrease. For the upcoming years also, it is expected that the interest rate for PF will gradually decrease.

In current scenario, even if a person earns Rs.25,000 or Rs.30,000 per month, his/her basic salary will be very less. From the basic salary, 12% will be contributed by the employee and 12% will be contributed by the company towards provident fund. Generally, provident fund is contributed for up to a basic pay of Rs.15,000 only. For basic pay which are greater than Rs.15,000, provident fund is not taken. So, even if you earn Rs.1 lakh, Rs.1,800 + Rs.1,800  (Rs.3,600) only will be contributed towards provident fund. And also, employees can voluntarily contribute towards provident fund (Voluntary Provident Fund).

Even though, if you do not take money from your provident fund (like for marriages, school fees and other emergency needs), the amount which you get at your retirement is very low only.

Practical Case Study

Let us assume that your age is 28. Your retirement age is 58. Therefore you have 30 years for your retirement. And you save Rs.3,600 in your provident fund. It gives an interest rate of 8.8% per year. Thus, your maturity money from your provident fund at the time of retirement will be Rs.56.73 lakhs. Look at the table below for your understanding.
Investment Type Expected per Annum Income Monthly Savings in Rs Maturity Amount after 30 yrs
PF/VPF/PPF 8.80% Rs.3,600 Rs.56,73,154
Equity Mutual Funds 12.00% Rs.3,600 Rs.1,04,25542
If you make the same investment amount in Equity mutual funds, then you could see that the annual income is 12.00% (even higher returns are also possible). You will get approximately 84% more returns from your equity mutual funds.
After seeing the above table, you could ask "So no need to invest in provident funds?". The answer to this question is "Don't invest more money on your provident funds". There is no doubt that provident fund is a more secured investment type. This type of investment should be made by everyone. Invest the money in provident fund which your company fixes as maximum match amount. But, investing your surplus money (not urgently needed) in equity mutual funds is the correct. Look at the another scenario (case study) how you could do it.

Taking a case study of a model family in which the familyman's age is 30. First child's age is 2. The needs of family, how to invest money is described through table 2. This must give you an idea on how to make investment plans for a normal family.
Need for Investment Money Needed at Present Years in Hand Money needed after yrs (column 3) incl. 6% inflation Monthly Investment PF/VPF/PPF (8.8% returns) Monthly Investment in Mutual Funds (12% returns)
College Fees Rs.10 Lakhs 15 Rs.24 Lakhs Rs.6,911 Rs.5,358
Marriage Rs.15 Lakhs 23 Rs.57.5 Lakhs Rs.7,053 Rs.4,565
Monthly Pension Rs.20,000 28 Rs.1.02 Crores Rs.13,377 Rs.7,659
Some employees take out the money in provident funds for buying new houses or flats. We can't say that it is wrong. Actually, you will get two advantages for Purchasing houses or flats through provident funds. The first advantage is that you will get a house or flat for residing, through which the money spent on house rent will be saved. The next advantage is that you will have your own house at the time of your retirement.

At the same time, the very important thing to note is that, you could invest the saved rent amount (or money greater than that) can be invested in provident fund or voluntary provident fund. Thus you will get more matured money at the time of your retirement.


Though Provident Fund, Voluntary Provident Fund and Public Provident Funds are more secured way of investment types, they give very less returns on long term. Therefore, young investors should invest less money on the above investment types and more money should be invested on Equity Mutual Funds. Those who need money in emergencies and those who are nearing their retirement should invest more money towards PF/VPF/PPF and less money on equity mutual funds.


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