How much of the money that you have set aside for investing for your retirement years should be invested in equities? There may not be a scientific answer to this, but most investment advisors would say it would depend on various factors, most important among them being your age and your appetite for risk.
So the older you grow the equity component should be progressively reduced in favour of safer fixed income investment to reduce volatility. Equities, as we all know, are risky investments.
The equities for retirement debate is taking an interesting turn in the market with the two principal vehicles to create an old age income security – the Employees’ Provident Fund Organisation (EPFO) and the National Pension System – taking widely divergent view on this issue.
The EPFO’s Central Board of Trustees (CBT), is slated to meet on July 8 to consider a hike in investments in Exchange-traded Funds (ETF) from the present 5 per cent. It has leeway to invest up to 15 per cent of its corpus in ETFs as per investment guidelines. ETFs provide an indirect avenue to invest in equities.
And on the other, NPS is seeking an option of an ‘aggressive’ life-cycle fund where equities can go up to 75 per cent at age 35. This is part of two new life cycle options proposed, the other being a ‘conservative’ fund which has maximum of 25 per cent equity exposure at age 35. NPS at present offers a fund with 50 per cent maximum exposure at age 35.
On a broader arena, the PFRDA, which administers NPS, appears to be the ‘aggressive’ player while EPFO has adopted a ‘conservative’ approach on equities. The latter also has to counter opposition from central trade unions who have decided to oppose the hike from 5 per cent in the CBT meeting slated for Friday.
However, the CBT would do well to overcome union resistance and go for a hike. Equities is the only asset class that has the potential to give returns that would meaningfully beat inflation in the long run. However, investment have to be done with adequate research and in good stocks. A good ETF would certainly have the expertise to handle the money in a mature manner.
A hike would also not do much harm to the fund’s returns even if the markets do not do well in the short term. However, those who are young and are mandatorily setting aside a chunk of their pay packet into EPF could be a happier lot at retirement with likely more money in hand. Even touching the 15 per cent ceiling soon could be a good idea. However, while doing so, EPFO could work out mechanisms to protect those near to retirement from market vagaries.