- Retirement planning should balance EPF's stability with equity's growth potential
- Younger investors can afford higher equity exposure, older ones need stability
- Inflation must be factored to ensure corpus maintains future purchasing power
Retirement planning is often reduced to a simple question: Should you put more money in EPF or equities?
But that may be the wrong question. EPF and equity serve very different purposes in a retirement portfolio. EPF offers stability and discipline. Equity offers the growth that can help a long-term corpus keep pace with inflation.
"The choice should not really be EPF versus equity. Both solve different problems," Charu Pahuja, CFPCM, Director & Chief Operating Officer, Wise FinServ, told NDTV.
According to Pahuja, the right mix depends on a person's age, time left for retirement, existing corpus, income stability and ability to handle market volatility.
Here are five things investors should consider before deciding their retirement allocation.
1. Look at the role, not just the return
EPF can form the stable or debt portion of a retirement portfolio. For FY 2025-26, an interest rate of 8.25 per cent has been recommended for EPF accounts.
Unlike equity, EPF does not move up and down with the stock market every day. Equity has a different job. Returns are not guaranteed. There can be years of weak or negative performance. But for someone with 20 or 30 years before retirement, avoiding equity completely can create another risk - the corpus may not grow fast enough to beat inflation.
Pahuja cautioned against changing asset allocation based on recent market performance. "Asset allocation should be decided by the retirement goal and time horizon, rather than recent market performance," she said.
2. Your age should decide how much risk you take
A 30-year-old and a 55-year-old cannot follow the same retirement strategy. A younger investor has time to recover from market corrections. That gives them more room to hold equity.
"Depending on risk profile and other assets, a young investor may consider having around 60-75% of the overall long-term retirement portfolio in equity, with EPF, debt and other stable assets forming the balance," Pahuja said.
This equation should change as retirement gets closer. Someone five to seven years away from retirement may not want 80-90 per cent of their retirement corpus exposed to equity. A sharp market fall just before retirement can cause far more damage than the same correction at age 30.
3. Don't let inflation fool you
A return may look good on paper. But retirement planning is about what that money will buy decades from now.
Suppose a household spends Rs 1 lakh a month today. That expense could be much higher 20 years from now. Healthcare costs, lifestyle expenses and a longer retirement can increase the amount needed.
This is where equity can play an important role. The objective is not to chase the highest return. It is to give the retirement corpus enough growth potential to maintain purchasing power over a long period.
"While EPF can provide an excellent foundation, an investor should ask a second question: Will my total retirement corpus grow sufficiently after accounting for inflation?" Pahuja said.
She also warned investors against assuming that high equity returns seen in recent years will continue indefinitely. Retirement calculations should use reasonable and conservative return assumptions.
4. EPF and equity differ sharply on tax and liquidity
EPF comes with important tax advantages, but investors should understand the rules rather than assume that every rupee in the account is always tax-free.
For equity investments, gains are taxable under the applicable capital gains rules. Under the current framework, qualifying listed equity and equity-oriented investments attract long-term capital gains tax at 12.5 per cent beyond the applicable Rs 1.25 lakh annual exemption. Specified short-term gains are taxed at 20 per cent.
Liquidity is another major difference. EPF has restrictions around withdrawals. That can actually help investors stay invested for retirement.
Equity mutual funds are far easier to redeem. That is useful when money is genuinely needed. But easy access can also tempt investors to dip into their retirement savings for short-term expenses.
Pahuja said investors should ideally maintain a separate emergency fund so that neither EPF nor long-term equity investments have to be disturbed unnecessarily.
5. Calculate the mix across your entire portfolio
This may be the most important point. Many salaried investors look at their EPF separately from their equity investments. That can give them a misleading picture of their actual asset allocation.
"Many salaried investors tell me that they are conservative because they have a large EPF balance, while separately saying that they are investing only a small amount through equity SIPs," Pahuja said.
Once all their retirement assets are put together, however, the picture can be very different. A person could unknowingly have 80-90 per cent of their long-term money in fixed-income assets.
The reverse can also happen. Someone with little EPF may have almost their entire retirement corpus in equity.
Pahuja recommends putting EPF, VPF, NPS, mutual funds, PMS, deposits and other retirement investments on one sheet. Investors can then calculate their actual equity-versus-debt allocation.
EPF For Stability, Equity For Growth
The retirement decision, therefore, is not about picking one over the other. It is about finding the right balance.
"Should I choose EPF or equity?" is the wrong question, Pahuja said. The better question is: How much stability do I need from EPF and debt, and how much growth do I need from equity to make my retirement plan work?
EPF can provide the foundation. Equity can provide long-term growth. As retirement gets closer, the balance can gradually shift towards stability. For investors, the biggest mistake may not be choosing too much EPF or too much equity. It may be failing to look at the entire retirement portfolio in the first place.
