Yes, you read that right! Contrary to popular perception, at Personalfn we believe that the recent rate cut in Employees Provident Fund was a move in the right direction.

The EPFO (Employees' Provident Fund Organisation) has proposed that the interest rate on EPF be reduced from 9.5% to 8.5% for the year 2005-06.

What does this mean for you? Contributions made from your salary towards EPF will now fetch you lower returns. And despite that, we believe that the move is a positive one.

The reason being, interest rates that are not in line with market rates are unsustainable over longer time periods. At a time when the benchmark 10-year GOI paper yields a return of 7.11%, an assured return of 9.5% for EPF does seem out of line.

The small savings segment has experienced its fair share of rationalisation (read less attractive returns) over the years. And similar measures were to be expected for the EPF as well.

In our view, a move which pegs interest rates in line with market rates will enhance the scheme's feasibility and sustainability. In other words it's a case of 'better less than none.'

In the past, we have seen cases wherein a dichotomous approach was adopted while dealing with individuals from varying income brackets. Smaller investors were given preferential treatment over high net worth investors (HNIs).

A similar structure cannot be ruled out for EPF going forward. We could see a scenario wherein individuals from lower income brackets continue to receive attractive returns on EPF, while a more rational structure is adopted for those in higher income brackets.

Traditionally avenues like EPF and PPF have been relied on while conducting retirement planning. However given that the rate cut could render EPF less attractive for some, this trend is unlikely to continue in the future. The solution to this lies in exploring alternate avenues while planning for their retirement.

Market-linked avenues like mutual funds could occupy a dominant position in investors' retirement kitty going forward. The large number of variants available in the mutual fund segment makes it possible for investors to invest for retirement in line with their risk profile.

The Retirement Planning Centre

Finally, a move like reducing interest rates on EPF is likely to put a lot of investors out of their 'comfort zone' and treat retirement planning with the seriousness it deserves. With attractive and assured returns to fall back upon, most of us have rarely felt the need to give retirement planning due importance in our scheme of investments.

Thanks to the new EPF regime, such a slack attitude could be a thing of the past.

As mentioned earlier, the rate cut in EPF can actually be a positive event for investors over the long-term; investors on their part need to accept and gear up for the new investment scenario.

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