EPF To Up Its Equity Exposure In Search Of Superior Returns
May 25, 2016

Author: PersonalFN Content & Research Team

The Employees’ Provident Fund (EPF) acts as a compulsory retirement savings scheme for more than four crore subscribers and is all set to step up its equity exposure in the Financial Year (FY) 2016-17. The Employee Provident Fund Organisation (EPFO), which functions under the Labour Ministry, had invested over Rs 6,000 crore in equity Exchange Traded Funds (ETFs) last fiscal. The EPFO’s decision to invest 5.0% of incremental deposits in equity assets wasn’t well received by the trade unions. Snubbing the resistance of trade unions, the Government had made up its mind to deploy at least a small portion of retirement savings in equity markets for the first time.

However, the first year brought only disappointment to the EPFO and its subscribers as the value of equity assets of the fund eroded by more than Rs 300 crore. This was a result of a 9.87% drop in the Nifty Index and a 10.30% fall in the value of S&P BSE Sensex. Nonetheless, by the end of April 2016, the investment managed to bounce back in the green by making a paltry gain of 1.68%.

On this backdrop, statements from the Labour Minister, Bandaru Dattatreya, hinting at the EPFO hiking its equity exposure were likely to create a new controversy. Based on the estimates of the Labour Ministry, Mint dated May 24, 2016, reported that the EPFO is likely to invest Rs 10,000 crore in equity markets this fiscal. Considering the annual incremental investments of Rs 1.2 lakh crore; this amount makes up 8.5% of the additional contributions.

Today, PersonalFN presents to you its analysis of the situation and also shares its perspective on equity investments from the point of view of one’s retirement planning.

PersonalFN is of the view that, in the absence of any other formidable social security scheme, the EPF forms an integral part of the retirement planning of people working in the organised sector. Therefore, the Government has to adopt a holistic view of the situation before making any crucial decision such as hiking the equity exposure. At the same time, EPF subscribers must understand that equity investments are primarily for the long term and thus, the one-year performance of the equity component of the EPF has little value.

There’s no denying that small doses of equity exposure may accelerate the returns for investors but the EPFO makes no customisation while making investments. For example, if a person is scheduled to retire in the next two years, he may prefer to avoid taking any new equity exposure, but as he has no say in deciding the asset allocation of the EPF. He would have no option but to go along with whatever the Labour Ministry considers right. The Government should consider such possibilities and avoid implementing its decisions in an ad-hoc manner.

PersonalFN also believes you should not solely rely on your EPF savings to take care of your post-retirement expenses. The success of your retirement plan largely depends on four factors. They are: