EPF vs NPS vs mutual funds: What’s the best mix for long-term retirement planning?
When planning for retirement, the Employees’ Provident Fund (EPF) is often the go-to option for many salaried individuals in India. As a government-backed scheme, it offers stability and tax efficiency, making it a widely favoured retirement savings tool. However, the question remains whether relying solely on EPF is enough to secure financial stability in your golden years.
The EPF is a compulsory savings plan regulated by the Employees’ Provident Fund Organisation (EPFO) and is applicable to employees in firms with 20 or more workers. Both the employee and employer contribute 12% of the employee’s basic salary and dearness allowance, with part of the employer’s contribution directed to the Employee Pension Scheme (EPS). The scheme boasts an interest rate of 8.25% for the fiscal year 2023–24, compounded annually.
Financial expert Balaka Aich remarks, “EPF is excellent for risk-averse investors seeking stable, tax-efficient returns,” highlighting its role as a fundamental part of a retirement strategy. Despite its benefits, Aich advises that, “given its limitations, especially on inflation-beating potential and liquidity, it’s best used as one leg of a larger retirement portfolio.”
The EPF offers several advantages. It provides a low-risk investment opportunity with tax-free interest and maturity, and its fully digital presence allows for easy management via the Universal Account Number (UAN). Additionally, automatic pension coverage under EPS and the discipline of monthly savings contribute to its allure as a stable investment vehicle.
However, the limitations of EPF cannot be overlooked. The fixed interest rate may not keep up with long-term inflation, and its returns are generally lower than those from the National Pension System (NPS) or equity mutual funds. Liquidity is restricted, with limited early withdrawal options, and the pension under EPS can be minimal and complex to calculate.
In comparison to other investment options like NPS and mutual funds, EPF offers lower returns but greater stability and tax advantages. NPS provides market-linked returns with moderate risk, while mutual funds can yield higher returns but come with greater risk and full investment control. Each option has its unique benefits, and understanding these can help tailor a retirement strategy that aligns with individual financial goals.
To maximise financial security in retirement, diversifying one’s portfolio is recommended. Combining EPF with the National Pension System (NPS) for additional tax benefits and investing in mutual funds for long-term growth can offer better protection against inflation and enhance financial freedom in retirement. This diversification not only spreads risk but also capitalizes on the strengths of each investment type.
Ultimately, while the EPF is a valuable tool for building a retirement corpus, it should not be the sole instrument. A balanced approach involving a mix of investment schemes can provide a more robust financial foundation for retirement, ensuring that you are well-prepared for the future. By understanding the strengths and limitations of each option, you can craft a strategy that best suits your individual needs and goals, paving the way for a secure and comfortable retirement.