The Employee Provident Fund Organization (EPFO) has denied investor’s money to be parked in equities and also holds reservations for investing in the infrastructure space as it perceives these asset classes to be risky. It believes that risky instruments could erode the investor’s retirement savings due to their inherent volatile nature. Hence in order to protect the retirement capital of employees, the Central Board of Trustees (CBT) (the apex advisory body of the Employees' Provident Fund) implemented new rules in November 2013, allowing retirement savings to be invested only in debt instruments.

Recognising this concern of EPFO and also to boost inflows in the mutual fund sector, the Securities and Exchange Board of India (SEBI) has recently suggested that only the pension funds of workers earning over Rs 6,500 per month and under the age group of 40-45 years should be invested in mutual funds. The regulatory body believes that while keeping an age limit would protect investors who are nearing retirement from unnecessary risks; the income limit would ensure that workers with a low salary would be safe from the volatility of capital markets. SEBI has proposed that the choice of opting for an equity component as a part of retirement savings, be left to the employee or member contributing to the Employees Provident Fund. It further states that in order to limit the risks an investor is exposed to, investment in mutual funds can be restricted to 20-25% of the employee’s contribution.

In its endeavor to boost inflows in the mutual fund space, SEBI has also proposed a new Mutual Fund Linked Retirement Plan (MFLR). This plan if implemented would provide tax incentives to investors, similar to the 401-k plan in the United States of America. In its proposal, the SEBI has suggested the Government that an investment of up to Rs 50,000 in MFLRP should be provided tax breaks, or the investment limit of Rs 1 lakh under section 80C of the Income Tax Act be raised to Rs 2 lakh. According to SEBI, this plan if implemented would bring a larger depth to the Indian capital markets by infusing Rs 18,000 crore (annual) of household savings. Also, this would lead to lesser dependability on Foreign Institutional Investors (FIIs) for inflows and thus lower market volatility.

PersonalFN is of the view that SEBI by imposing minimum salary limit and an age group, has given a proposal that filters investors. Moreover, it is voluntary for an employee / member to add a zing of equity to retirement savings; so someone who is risk averse can stay away from equity exposure in retirement savings. At PersonalFN we think that creating age and income related restrictions for investing in equities for building a retirement corpus could prove beneficial for both, the investors as well as the capital markets in general. You see, investing in only debt instruments limits the scope of growth of your retirement savings, which hinders clocking an effective real rate of return that can counter the inflation bug better. It is imperative that equity form a part of your retirement portfolio while you vie to retire rich. It is noteworthy that with equities being an effective wealth multiplier and a hedge against inflation, the savings of investors would grow relatively faster and thus would enable them to live the golden years of their retirement comfortably.

As far as the introduction of Mutual Fund Linked Retirement Plan is concerned, PersonalFN believes that the introduction of MFLRP could boost investor savings and encourage investors to invest a larger amount in mutual funds due to the tax incentives provided. However, it must be borne in mind that tax incentives alone should never be criteria to determine your investment avenues. Investments must be done only after analyzing the risk reward matrix and considering your financial goals.

PersonalFN believes that if the CBT agrees to liberalise investment norms for EPF , your savings could finally find their way into the stock market and increase the employee pension fund savings of investors. However, you must not depend only on your EPF investments while saving for retirement. In our view, chalking-out a prudent financial plan with the help of a financial planner, and investing wisely as per the plan laid out (which would mostly recommend you a higher equity allocation at younger age, and then as your age progresses balance the asset allocation between equity and debt instruments), would enable you to create substantial wealth to meet your retirements needs.
 

Add Comments