Voluntary PF good option to build retirement corpus

Retirement planning is one of the key components of financial planning. Retirement planning requires focused investment approach with safety of investments being a key focus area. An individual needs to ensure that post retirement, he or she has a certain corpus to take care of post retirement needs. It won’t be incorrect to say that to build a sizeable retirement corpus debt should be an integral part of it.

There are several investment instruments available under the debt schemes. For salaried person one such scheme is Employee Provident Fund (EPF). As per the law every employer deducts 12% of salary (basic plus dearness allowance) every month and contributes an equal amount in the EPF kitty. This helps build a good corpus for retirement. However, this may be sufficient enough. In order to ensure, creation of a healthy corpus for retirement, voluntary provident fund (VPF) can act as a sensible alternative.

Voluntary provident fund or VPF allows you to go beyond the mandated 12 per cent deduction from your basic and dearness allowance to additionally contribute up to 100 per cent of the above component every month.  However, employer will not contribute beyond 12% which is done when contribution is made in EPF. What are the reasons for investing in VPF and why it is better than most of the debt scheme? Let us have a look at the factors:

1) Interest earned is tax free: Interest earned from VPF investment is tax free. This means whatever interest you earn as a result of investment made is treated as tax free.

2) Easy to operate: It is very easy to contribute funds in VPF account. Just give an instruction to your employer to deduct a certain percentage of salary as VPF every month. The amount is directly deducted from salary and deposited along with your EPF corpus. This builds a sense of discipline for an individual as far as regular investment is concerned.

3) No limit of investment: In investment options like PPF , an individual cannot invest beyond 1 lakh. While in VPF, there is no such limit. So you can make investments beyond 1 lakh as per your requirement and availability of funds.

However, there are flip sides of investment in VPF as well. Rate of interest earned varies from year to year. So you can only predict an approximate corpus that can be created and not the exact corpus. Also the investment into VPF may not always beat inflation and hence inflation adjusted returns can turn negative in some years. However, this is good option to diversify portfolio of investments. Coupled with other investment options like mutual fund and direct equity investment, VPF and EPF can create a well diversified portfolio.