Demonetisation: Rise in bond prices pushes up NPS returns but EPF rate may be cut

Demonetisation may have caused problems in daily life, but it has also given a boost to the retirement savings of millions of Indians. Bond yields, which were already on the decline, have plummeted 56 basis points since 8 November, pushing up bond prices. NPS funds, which hold long-term bonds, have benefitted from the development. All NPS investors, including some 50 lakh state and central government workers covered by the scheme, have earned double-digit returns in the past 1-5 years.

NPS investors split their corpus across three different classes of funds so ET Wealth looked at blended returns of different types of investors. We found that ultra-safe investors, who put 60% of their corpus in G class gilt funds and 40% in corporate bond funds, have earned the highest returns. This is mainly due to the bond rally that began earlier this year and gained momentum after the demonetisation. Investors in Kotak Pension Fund have earned 20.2% in the past one year, while the average ultra-safe investor has earned 19.2%.

Conservative investors, who put only 20% in stocks and the rest in gilts and corporate bonds have also done well, as have balanced investors who split their corpus equally between the three fund classes.

While falling interest rates have boosted the returns of NPS investors, they should be a cause of worry for subscribers to the Employees’ Provident Fund (EPF). Every month, an estimated Rs 9,500 crore flows into the EPF by way of contributions. Part of this is used for payouts and the rest gets invested in securities. The fall in interest rates means this money will now get invested at a lower rate, which could result in lower returns for the EPF.

Two months ago, the Employee Provident Fund Organisation had decided to increase the allocation to equities from 5% to 10% following pressure from the government. But the downturn in the stock market means these investments are in the red. This will put further pressure on the EPF returns. Subscribers should brace for a cut in rate as the EPF may not be able to pay 8.7% this year.

Courtesy: Economics Times

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