Although many labour unions have opposed the move for years, the government has implemented the new investment pattern
THE long-awaited nod from the ministry of labour allowing EPFO to invest in the stock market will help channelise a part of household savings into equity and provide risk-adjusted returns. The decision will have a significant bearing on the size of the retirement funds of salaried employees covered by the EPFO, who can expect to get a higher corpus on superannuation.
Although many labour unions have opposed the move for years, the government has implemented the new investment pattern. By investing only in Central and state government securities and public sector bonds, it was becoming difficult for fund managers to earn a high yield for subscribers. The EPFO, which has over 6 crore active subscribers, has a corpus of Rs 8.25 lakh crore. Till recently, it invested its funds in Central and state governments securities because of the assured returns. EPF subscribers received an 8.75% payout on their savings in 2014-15.
To start with, EPFO has decided to invest 5% of its incremental corpus of Rs 1 lakh crore — that is, Rs 5,000 crore — in exchange-traded funds (ETFs) in 2015-16. Since fund managers seek to maximise long-term returns, Indian equity markets are good avenues for investment. While the proportion of equity investment may not be big enough now, the decision could have far-reaching effects on the overall returns of the 100% debt-based provident fund.
In fact, the National Pension System (NPS) funds for Central and state government employees, which invest up to 15% of their corpus in stocks, have outperformed the provident fund by a significant margin in the past five years. Even for NPS, an expert committee headed by GN Bajpai has recommended to raise the equity investment cap for government employees to 50% like private sector employees.
While investment in direct shares of BSE- or NSE-listed companies, which have more than Rs 5,000 crore in market capitalisation, is permitted, the EPFO will begin its equity investment journey through ETFs. An ETF comprises a clutch of stocks that reflect the composition of an index, like S&P CNX Nifty, or BSE Sensex, and are traded on stock exchanges like company stocks. By investing a portion of the EPF money in equity, the long-term return can be much higher.
However, there should be some hedge through equity derivatives, which will provide some cushion to the investment during downturns. Since it’s the hard-earned money of employees, EPFO and exempt trusts will have to do their due-diligence and protect the subscribers’ interest.
Even globally, pension funds invest a sizeable portion of their funds in the equity market and earn higher returns. So, depending on the progress and returns, EPFO should consider investing more of its income in equity. The main objective of any retirement fund is to earn returns to help the retired person lead a comfortable life. With more competition from National Pension System, EPFO will devise newer ways to retain its subscribers, keep its costs low and and give higher returns to its subscribers.
The writer is CMD, Genius Consultants, an HR outsourcing firm