EPFO investment: Small and pointless

EPFO's current plan to invest only Rs 5,000 crores is just 0.5 pc of the organisation's total deposits.

For many who are retiring, the Employees Provi-dent Fund Organisation (EPFO) has come as a handy tool for post-retirement financial support. The EPFO has been undergoing significant changes over the past few months. One big decision is investing its funds in the stock market. This is in complete departure from what the EPFO did earlier.

The EPFO’s apex decision-making body, the Central Board of Trustees’ (CBT), has decided to invest in Exchange Traded Funds (ETF) which are considered safer than making investments in single equity shares of a company. Trade unionists on its board have opposed the move in view of volatility of stock markets.

For the reason that the EPFO investment is a post-retirement family earning, adequate investible money needs to be put in the stock market as the money invested in ETF will ultimately scrape up good profits. While EPFO expects that over the next 5 years the compounded annual growth rate of equity will be 12 per cent, it is mindful of the fact that this target may only be achieved in the long term as there may be year to year volatility.

As per the decision, EPFO will, every year, invest five per cent of the fresh deposits in ETF. Accordingly, it will park Rs 5,000 crores this fiscal.

It has already invested Rs 2,322.1 crore in ETFs in August-October period through SBI Mutual Funds.

The retirement fund body entered the stock market on August 6 this year after the government notified new investment norm allowing it to invest a minimum of 5 per cent and up to 15 per cent of its incremental deposits in equity or equity-related schemes.

Prima facie, this amount is irrelevant in comparison to the 8.5 lakh crores of investible money on which EPFO is presently sitting. Even those who believe in the dictum that little drops make an ocean, are not hesitant to say that with Rs 5,000 crores, one can’t even dig a reservoir, not to speak of an ocean. The money is being invested on the basis of two benchmarks – Sensex and Nifty.

In the past, those who put their savings in the EPFO were expecting only safe returns for their hard-earned money. Year after year, as the interest rates came down, the returns on EPFO investments, too, dwindled. At the moment, the organisation pays 8.7 per cent interest per annum for the deposits. With inflation hovering around 6 per cent, the interest accruing to individual investors is of no consequence and the actual returns are trifling.

There is nothing wrong if EPFO parks its funds in the ETF. But the amount to be invested are so little that this hardly will have any impact. In hybrid mutual funds, one part of the money is invested in debt and another part in equity. Moreover, the experience of investors in this case has been mixed. For instance, if someone invests 65 per cent of the money in equity, s/he gets a decent return over a long period of time. In contrast, parking 25 per cent of funds in equity hardly pays.

Greater returns
Traditionally, if one invests for seven years in the sensex, losses are nil. Sensex happened in 1980 and a seven-year itemisation will show how investors have immensely gained by investing. A long time investment will see the returns anywhere between 15 to 16 per cent. This is the only reason why the government should encourage the EPFO to invest more in equity.

EPFO should go in for an annual incremental investment of 10-15 per cent in ETF. Also, the accruals should be reinvested. EPFO’s current plan to invest only Rs 5,000 crores is just 0.5 per cent of the organisation’s total deposits. So little and so tiny!

It may be pointed out that the EPFO has some six crore shareholders and most of them are at present investing in either central or state government securities. So, the news that EPFO will park some money in the share market won’t bring much cheer.

To believe that post-retirement, your EPFO money will bring in very high returns is vacuous. True, EPFO’s participation in the stock market will benefit all and sundry. But it should be a recurring feature and regular investments can only bring strength to the share market.

In the coming years, when employees will come in huge numbers and start investing, EPFO can turn itself to be just like any other established fund. That will also provide the necessary stability to the market and gains, too, will be significant. While EPFO’s contribution to the growth of the share market is to be acknowledged, the obvious beneficiaries will be the superannuating population.

Evidently, the EPFO and the labour ministry have to keep an eye on these investments and must watch out how it actually behaves. But, unless the EPFO decides to invest at least 20 per cent of its funds, the whole exercise will be pointless.

In advanced countries, pension funds play a bigger role in the share market. Therefore, EPFO must come out with a clear cut goal. It can’t make the product attractive unless it turns out to be a dynamic one. Return is central to personal investments.