Retirement boon: Changes to EPFO will increase scheme’s return potential, mean more freedom for subscribers

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New Delhi | Published: July 30, 2018 1:39:10 AM

The labour ministry is mulling over a change that will enable EPFO subscribers to invest in equity or debt, as they see fit. As per The Economic Times (ET), the change will see the existing restrictions placed on these class of investments removed.

EPFO started to invest in equities in 2015, with an initial 5% cap.

The labour ministry is mulling over a change that will enable EPFO subscribers to invest in equity or debt, as they see fit. As per The Economic Times (ET), the change will see the existing restrictions placed on these class of investments removed. Equity exposure for EPFO subscribers, today, is capped at just 15%. The proposed changes seek to match the EPFO with the NPS in terms of the rates of return, as NPS permits investment in all types of instruments, namely government securities, debt instruments, equity investments, money markets and infrastructure investment trusts. The 5 crore EPFO subscribers can now look forward to improving rates of return, as the scheme’s returns are 1-2 percentage points (8.5%) behind those of the NPS (10%).

EPFO started to invest in equities in 2015, with an initial 5% cap. Now, up to 50% of a subscriber’s PF corpus can be invested in government securities, up to 45% in debt instruments, up to 15% in equity and 5% each in money markets and infrastructure trusts. NPS gives subscribers—only from the private sector, though—the option to invest up to 75% in equities. As per ET, government securities and debt bonds provide around 7% annualised returns to the EPFO, while the return on equity investments under the scheme has been over 16% since it started in 2015, highlighting the potential increases that diverting one’s investments towards the stock market can bring. For example, a corpus of `50,000 will deliver a 35% increase in interest earned over 30 years with just a one percentage point increase in return, from 8.5% to 9.5%. The option to construct one’s portfolio as one sees fit will also allow the more risk-averse investors to hedge and diversify their risks as much as possible, while allowing investors with a larger risk appetite to benefit from riding the the equity horse, after EPFO’s irrational stranglehold that has prevented them from actualising increased returns is done away with.

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