Retirement savings vehicle, the Employees’ Provident Fund could soon have higher exposure to the equity market. The Central Board of Trustees (CBT of the The Employees’ Provident Fund Organisation (EPFO) will be meeting on July 7 to consider increasing investment in EPF to Exchange Traded Funds (ETFs), Union Labour Minister Bandaru Dattatreys has said.
Currently 5 per cent of EPF corpus is invested in ETFs in its efforts to take advantage of possible higher returns from the equity market. The government has given a leeway to invest upto 15 per cent of the corpus in equities.
Exchange Traded Funds, or ETFs, are funds that invest in various securities and are traded on stock exchanges.
Is the EPFO move to increase exposure to ETFs a good initiative for members like you and me whose money they are managing to provide a reasonable corpus at a time of retirement?
Personal finance experts feel the move by EPFO would be beneficial for members of fund in the long run.
“As the motive of the EPFO is to help individuals save for their retirement it would make sense to reap the benefits of equity investing. ETFs are considered more flexible and more convenient than index funds. ETFs can be traded more easily than index funds and traditional mutual funds, similar to how common stocks are traded on a stock exchange. ETFs help reap the benefits of diversification, tax efficiency along with low costs,” Manish Shah, CEO, Bigdecisions.com told FeMoney.
However, he acknowledged that there could be short-term fluctuations in returns from the invested corpus. “Any investment product linked to the market is embedded with volatility. Due to this, the EPFO can’t guarantee the returns on the percentage of the portfolio allocated to equity investments,” Shah said.
Anil Rego, CEO & Founder, Right Horizons, agrees. “ETFs are among the cheapest ways to participate in the markets. Since investment is proposed to be in widely followed ETFs such as Nifty the basket of stocks are market leaders. EPF is primarily targeted at retirement, which is a long term objective. Risk associated with equity reduces in the long term, even as returns improve. Equities have performed better than debt investments over most periods, if investment is for the long term,” Rego said.
He pointed out that the biggest advantage for ETF is that is is tax-free after 1 year besides having higher upside potential on returns.
Rego advises caution against withdrawal of EPF funds when markets are in a bear phase. “Market volatility impacts all investments, including equity and debt. Withdrawal of EPF balances when the debt and equity markets are both low would impact the amount available,” he said.
Labour Minister, Dattatreya had pointed out that on March 31, 2016, EPFO had invested Rs 6,577 crore which grew to Rs 6,601 crore, a 0.37 per cent increase. On April 30, 2016, the amount invested was Rs 6,674 crore which grew to Rs 6,786 crore, up 1.68 per cent.