EPFO: With PF interest rates stuck since April 2020; can you still make a lot of money through it?

The Employees' Provident Fund (EPF) is a cherished savings instrument among India's working class. With contributions pouring in monthly from both employers and employees, it aims to create a significant retirement corpus. The scheme, managed by the Employees’ Provident Fund Organisation (EPFO), has long been lauded for its attractive benefits, thanks to fixed, safe, and tax-free returns.

However, with the interest rates stagnating since April 2020, the question arises - Can you still accumulate a substantial amount through your EPF investments?

EPFO has announced an interest rate of 8.15 per cent for the financial year 2022-23. This is a marginal increase of 0.05 percent from the previous year. It is important to note that this rate, though recommended, is subject to approval by the Ministry of Finance. The interest is calculated monthly and credited annually to the subscriber's account.

It's crucial to remember that EPF is not a short-term savings scheme. The EPFO manages the scheme as a long-term savings option to build a substantial corpus for retirement.

Understanding risk and reward in EPF investments

Investments are often set on a risk-reward ratio. This investment principle asserts that potential return grows with an increase in risk. Simply put, higher risks potentially offer higher returns, but they also carry the potential for significant losses.

The EPF offers a safe investment avenue that is meant for providing retirement savings for India's working class. With the benefits of fixed, safe, and tax-free returns, EPF is often considered a low-risk investment. While EPFO offers guaranteed returns, thereby presenting a lower risk, it also means that the returns are relatively modest. Given this scenario, it becomes challenging to build massive wealth with just the EPF investments.

The risk and reward of Equity Mutual Funds

When it comes to building wealth more quickly, riskier investment instruments like equity mutual funds, stocks, commodities and forex could be more suitable. For example, the top performers in mutual funds across the past three years have been known to offer significantly higher returns, sometimes as much as 25 per cent. However, these higher returns come with higher risks, which may not be suitable for every investor.

The key to building wealth through investment while ensuring enough security lies in diversification. Diversifying your investment portfolio can allow you to minimise the risk while also providing the opportunity to capitalise on the high returns of riskier investment instruments.

A diversified portfolio might include a significant portion invested in EPF, offering stability and steady growth, while the remainder could be allocated to more rewarding but risky investments. The precise allocation would depend on the individual's risk appetite and financial goals.

By employing this strategy, it could be possible to create wealth while also ensuring security through guaranteed returns from low-risk investments like EPF.