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EPF To Fetch Lower Returns For FY19-20

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After labour ministry efforts paid off this year as it managed to convince the finance ministry to provide EPF interest rate of 8.65% for the FY ending March 2019, for the year ending March 2020, the interest rate on compulsory EPF investment is likely to trend lower. The decline in earnings can be by as much as 15-25 basis points said two government officials privy to the development. One basis point is one-hundredth of a percentage point.

EPF To Fetch Lower Returns For FY19-20
 

The decision shall be taken considering economic slump as well as lower yield on government securities and other fixed income instrument including bank fixed deposits and other post office savings scheme such as PPF. It is worth mentioning that despite nudge from the finance ministry, interest rate on small savings scheme have been held steady for the first quarter for CY2020.

As per one of the official, after a series of meeting of the retirement fund body's fund manager with different stakeholders including CBT, executive committee members and investment officials, the announcement of interest rate for the FY 2019-20 on EPF is likely to be made by month end.

"The economic downturn was visible this year. The falling returns on debt instruments will force the EPFO to tinker its 2019-20 payout downwards," said the first official. "The long-term fixed deposits and some bond yields have gone down by between 50 and 90 basis points in the last one year and you cannot ignore those indicators."

"The 10-year benchmark government securities or G-Secs went down between 85 and 90 basis points between January 2019 and January 2020" and that would be a drag on EPFO's earnings, said the second official.

A 100-basis point fall in interest rates in the market has the potential to impact the EPF payout by between 55 and 70 basis points, the official said. As such, EPFO will find it difficult to offer 8.65% interest this fiscal, especially as it invests 85% of its annual accruals in the debt market and 15% in equities through exchange-traded funds. "Thus, a 15-25 basis point cut in EPF interest rate this fiscal should not come as a surprise," said the second official.

 

Also, another factor that may deter the retirement fund body to offer attractive interest rates of EPF is that the institution found it difficult to recover some of its investments in crisis-ridden DHFL and IL&FS. On August 14, the leading daily reported that Rs. 1300 crore directly invested by the organisation's manager remains stuck with two of the firms.

GoodReturns.in

Story first published: Monday, January 6, 2020, 13:05 [IST]
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