Should You Invest Your EPF Withdrawal in Equity?

Who Can Withdraw From EPF and How Much?

The Union labour ministry amended the EPF scheme on March 28 to allow members to withdraw non-refundable advances in view of the nation-wide lockdown. This is being done to ease any financial crunch caused due the lockdown and ensure that there is adequate liquidity among the general public.

Who can withdraw and how much can be withdrawn?

Any employee who has been contributing to the EPF by way of mandatory deduction of 12 percent from their basic salaries every month can use this facility.

You can withdraw up to 75% of your EPF balance or three months’ equivalent of your basic salary and dearness allowance, whichever is lower. This is a non-refundable and tax-free withdrawal that individuals can make from their EPF account.

How to withdraw from your EPF online?

• Visit the EPFO website and Login using your UAN and password.
• Visit online services section and select the claim form
• Once you do that, enter the last 4 digits of your bank account under the ‘Member Details’ section and click on ‘Verify’.
• On the next page, you will have to click on PF advance form 31 and then select ‘outbreak of pandemic COVID-19’ as the reason from the drop down list.
• Now fill the required details, including how much you wish to withdraw as advance and the address.
• Either 75 per cent or your 3 months’ salary or the requested amount, whichever is lower, will automatically be selected by the system.
• Once your claim is processed, the amount will be credited directly to the bank account automatically.

The EPFO has prepared detailed FAQs on this. You can access it here.

Is this an opportunity to invest in Equity?

The stock markets have tanked and have erased gains earned over the past few years. They are now at attractive valuations and many are tempted to invest into the stock markets and benefit. So should you withdraw from your EPF and invest in the stock markets? The answer lies in the details and is different for each one of us. Let us evaluate a few scenarios;

• Scenario 1 : You are a conservative investor; your risk profiling exercise recommends that debt is the ideal investment avenue for your portfolio. Make no changes as there is no other investment that can guarantee a tax-free investment that is currently giving you 8.5% p.a.
• Scenario 2 : You are young, have no or very little exposure to equity and will stay invested for the long term, then yes, you can take advantage of this facility and withdraw and increase your exposure to equities.
• Scenario 3 : You have arrived at your ideal asset allocation and see that there is room for more investment in equities and understand that equities work best in the long term. You understand that markets are volatile in the short run. If yes then, you may consider increasing your equity allocation using this one time tax-free advance.

The downside risks could be that the market might sharply correct further from the current levels. The equity market could take years to recover from current levels and leave you wondering if it was worth to let go of the guaranteed returns from EPF.

A few important points to consider before taking the plunge;

• Ensure that your emergency corpus for six to twelve months is fully funded
• You have adequate life and medical insurance cover
• All goals due within the next three – five years are not heavily exposed to equity
• Your mandatory expenses like rents, EMIs and insurance payments can be serviced in the near term
• You don’t have credit card debt or expensive personal loans

Consult your financial adviser to arrive at the most suitable solution for you. Get a FREE risk profile assessment done to arrive at the ideal asset allocation you should maintain to achieve your goals.

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