Editorial: EPFO shouldn’t junk stocks

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Updated: November 26, 2015 1:49:11 AM

Unions must realise markets give returns over time.

While the central board of trustees of the Employees’ Provident Fund Organisation (EPFO) will take the final call, trade unions that have been against investing part of the corpus in equity markets are using data—returns on investments in the market over the last 3 months—to argue that the move will hurt workers. Between August and October, EPFO invested R2,322 crore in the markets—75% invested in an exchange-traded fund (ETF) based on the Nifty and the rest in a Sensex ETF—which has yielded an annualised return of 1.5%. As unions point out, this is much less than the yields got from other investments like G-Secs that yield 7.9%. But this is a remarkably short-sighted view since markets have been very choppy and have fallen in keeping with poor corporate earnings and short-run prospects—indeed, if the EPFO was to mark-to-market its bonds, every time interest rates fell, the fall in G-Sec prices would ensure the yield on even fixed-income securities would be very low.

While inflation ensures the EPFO returns got negligible real returns on the largely debt-oriented portfolio, over a period of 10 years, both the Nifty and Sensex have generated around 12% annually and some of the sector funds of mutual funds have generated more—Nifty Auto has given 18% and Nifty Pharma has reported 19% in the 10-year period. Were the EPFO to move a large part of its corpus to equity, this will boost earnings. Right now, it can invest just between 5-15% of each year’s fresh accretion in the market—it is investing only 5%. An analysis done by GN Bajpai committee on the investment pattern of the National Pension Scheme found that a 1% increase in annual returns of pension funds increases the terminal pension wealth for a full 40-year lifetime of contributions by 30%. An overload of fixed income securities in EPFO will not be able to ensure any meaningful old-age income security. That’s what the central board of trustees needs to keep in mind.

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