Arthgyaan

Supporting everyone's personal finance journey

EPF vs. mutual funds: which is better?

The article presents a historical analysis of investing in stocks vs. EPF since 1979.

EPF vs. mutual funds: which is better?


Posted on 02 Jul 2023
Author: Sayan Sircar
7 mins read
Get new post notifications on WhatsApp!

The article presents a historical analysis of investing in stocks vs. EPF since 1979.

EPF vs. mutual funds: which is better?

Many investors wonder which is a better option for long-term investment: Employee Provident Fund or investing in the stock market via mutual funds.

šŸ“š Topics covered:

We run a simulation using historical data to check which option has been better. The simulation takes the case of two individuals

  • Conservative investor Mr P who invests monthly in EPF
  • Risk-taking investor Mr S who invests the same in a (hypothetical) Sensex index fund

We are following the same methodology as our previous article on PPF vs mutual funds here: PPF vs. mutual funds: which is better?. The key difference between PPF and EPF is that while PPF is an optional investment open to all investors whether salaried or not, the EPF is open only to salaried employees but is mandatory for most salaried employees.

In this article, we will show the results of running a 15-year investment in EPF vs the Sensex (to represent stock investing via mutual funds) in this way:

  • we use historical interest rates and annual limits of EPF from 1952 till date, along with Sensex data from 1979
  • SENSEX data is the price index from 1979 to 1996 and then onwards it is the SENSEX Total Return Index (TRI) which includes dividends
  • we run a 15-year or 180-month simulation multiple times: from Mar-1979 to Mar-1994, Apr-1979 to Apr-1994 and so on. We chose 15 years since that is the maturity period for PPF in the original PPF vs. mutual funds analysis and have kept the same window for easy comparison
  • we do not exit the portfolios after 15 years, and hence there are no taxes on selling

We did not have mutual funds in 1979, but we have today, and not having mutual funds in the 1970s does not invalidate the conclusions below.

Historical interest rate of EPF

Using data from the EPF India website, we plot the historical interest rates of EPF since 1952.

EPF Interest Rate History

Some observations:

  • EPF rates before the 1980s were below the levels of today
  • will EPF rates go lower from the current levels: history shows us that it has been a lot lower, and there is no reason why it cannot go a lot lower
  • there was a long period of 15-ish years (1985 to 2000) where interest rates were their highest, i.e. 10-12%. If you have a longing for those rates, do remember the condition of the economy in the same period
  • EPF investment is capped at 12% of basic (plus DA) with an equal match from the employer per year
  • employees can invest more than this cap per year via the Voluntary Provident Fund (VPF) which has the same interest rate

SENSEX vs EPF yearly returns since 1979

Yearly SENSEX returns has been quite volatile but EPF, even with regular changes, the EPF rate has been quite stable.

Recent articles:
1 / 3
<p>A quick retirement calculation for a reader query who has a good amount of corpus already saved for retirement.</p>
2 / 3
<p>This article explains the PFRDA announcement about a new default scheme under NPS Tier II for government employee subscribers.</p>
3 / 3
<p>As per SEBI rules, mutual fund investors must have nominees in their folios by 1st October 2023 or explicitly opt out. Otherwise they will face restrictions in selling units.</p>

Join the Arthgyaan WhatsApp community: You can stay updated on our latest content and learn about our webinars. Our community is fully private so that no one, other than the admin, can see your name or number. Also, we will not spam you.

Making a monthly investment in stocks vs EPF

We will invest the same amount at the beginning of the month in EPF or Sensex. The amount is 1/12th of one lakh but since EPF is tied to salary (basic plus dearness allowance), we have assumed a hike of 10% of the investment amount per year. The interest rate taken is the actual EPF rate in that period. We also use the actual Sensex returns for the final portfolio value over the period.

15-year investment in EPF vs. mutual funds

Sensex vs EPF - 15 years of investing

The result shows that in most of the 300+ cases in this simulation, Mr S, the stock investor, comes out ahead. Only in some extreme market events, like the post-Harshad Mehta years, the 2008 global financial crisis or the 2020 COVID-19 crash, did the EPF portfolio do better in 13% cases.

Sensex vs EPF - XIRR of 15 years of investing

In this chart, we see how the returns of the EPF investment have risen and later fallen with EPF rates while that of the Sensex investment has been unpredictable.

Since EPF is a longer term investment, we will now compare EPF with mutual funds for 20,25 and 30 year holding periods with the same analysis methodology.

20-year investment in EPF vs. mutual funds

Sensex vs EPF - 20 years of investing

Sensex vs EPF - XIRR of 20 years of investing

25-year investment in EPF vs. mutual funds

Sensex vs EPF - 25 years of investing

Sensex vs EPF - XIRR of 25 years of investing

30-year investment in EPF vs. mutual funds

Sensex vs EPF - 30 years of investing

Sensex vs EPF - XIRR of 30 years of investing

The clear conclusion here is that for longer holding periods, investment in mutual funds has beaten EPF in all cases where data is available.

Conclusions

Caveats with the analysis

We should keep in mind the following points while concluding anything from this analysis:

  • the analysis uses ~45 years of data, but that does not mean that the trends seen in the past will repeat in the future
  • some active mutual funds with sufficient long history may have beaten the Sensex over most of these periods and hence do not change the conclusion
  • a ā€œdumbā€ SIP in stocks is unpredictable, and returns vary considerably based on the ending point of the 15 years. Instead, the right way to follow goal-based investing and reduce equity allocation as the goal comes closer
  • we exclude the tax benefit under 80C for the EPF investment since it is straightforward to max out the ₹150,000 limit using other eligible investments

Can we use this data to say that ā€œstocks are usually better than EPFā€? That is mostly true. However, EPF has some benefits like guaranteed tax-free returns that stocks do not have.

There is another point that we need to keep in mind. From 2015 onwards, the EPFO is allowed to invest from 5-15% of its corpus (starting with fresh inflows) into the stock market via exchange traded funds. Therefore the fixed return of the EPF is somewhat contradictory given that the EPF portfolio now holds both bonds and stocks.

Does it make sense to invest in EPF?

We should not construct a portfolio for long-term goals only with stocks since we have shown before that the end result of such a portfolio is unknown. The better option is to create a portfolio with both debt and equity as asset classes and rebalance between the two per an appropriate glide path.

Given that the EPF is mandatory for salaried employees, it cannot be avoided. However, as per the results of this article, extra investments via the VPF for those who are salaried may be avoided. We will cover the alternative to EPF/VPF in a future article.

What's next? You can join the Arthgyaan WhatsApp community

You can stay updated on our latest content and learn about our webinars. Our community is fully private so that no one, other than the admin, can see your name or number. Also, we will not spam you.

If you liked this article, please leave us a rating

The following button will take you to Trustpilot:

Discover an article from the archives

Worked out case studies for goal-based investing

Previous and next articles:

<p>This article provides the latest updates to the Liberalised Remittance Scheme (LRS) and Tax Collected at Source (TCS) rules as applicable from 1st Oct 2023.</p>
Tax International Investing
How the government has provided relief to travellers and international investors by tweaking the LRS and TCS rules from 1st Oct 2023?

This article provides the latest updates to the Liberalised Remittance Scheme (LRS) and Tax Collected at Source (TCS) rules as applicable from 1st Oct 2023.

Published: 29 June 2023

4 MIN READ


<p>This article gives you the current and historical interest rates for EPF so that you can track how the rate has moved since the 1950s.</p>
Choosing Investments
What is the latest Employees Provident Fund (EPF) rate? What are the historical rates for EPF?

This article gives you the current and historical interest rates for EPF so that you can track how the rate has moved since the 1950s.

Published: 5 July 2023

3 MIN READ


Latest articles:

<p>This article shows a handy ready reckoner for home loan EMI amounts for all tenures and interest rates along with the amount of principal and interest to be paid.</p>
House Purchase
How much EMI do I have to pay for my home loan?

This article shows a handy ready reckoner for home loan EMI amounts for all tenures and interest rates along with the amount of principal and interest to be paid.

Published: 29 September 2023

1 MIN READ


<p>A quick retirement calculation for a reader query who has a good amount of corpus already saved for retirement.</p>
Retirement Reader Questions
How much money does this 39 year old investor need to invest per month to retire at 58?

A quick retirement calculation for a reader query who has a good amount of corpus already saved for retirement.

Published: 27 September 2023

7 MIN READ


Topics you will like:

Asset Allocation (20) Basics (8) Behaviour (10) Budgeting (11) Calculator (17) Case Study (6) Children (12) Choosing Investments (38) FAQ (6) FIRE (13) Gold (11) Health Insurance (4) House Purchase (17) Insurance (15) International Investing (10) Life Stages (2) Loans (9) Market Movements (13) Mutual Funds (29) NPS (6) NRI (13) News (9) Pension (8) Portfolio Construction (46) Portfolio Review (27) Reader Questions (6) Real Estate (6) Retirement (36) Review (12) Risk (6) Safe Withdrawal Rate (5) Set Goals (27) Step by step (14) Tax (37)

Next steps:

1. Email me with any questions.

2. Use our goal-based investing template to prepare a financial plan for yourself
OR
use this quick and fast online calculator to find out the SIP amount and asset allocation for your goals.

Don't forget to share this article on WhatsApp or Twitter or post this to Facebook.

Discuss this post with us via Facebook or get regular bite-sized updates on Twitter.

More posts...

Disclaimer: Content on this site is for educational purpose only and is not financial advice. Nothing on this site should be construed as an offer or recommendation to buy/sell any financial product or service. Please consult a registered investment advisor before making any investments.

This post titled EPF vs. mutual funds: which is better? first appeared on 02 Jul 2023 at https://arthgyaan.com


We are currently at 299 posts and growing fast. Search this site:
Copyright Ā© 2021-2023 Arthgyaan.com. All rights reserved.