Monday, December 12, 2011

Why EPFO doesn’t invest in equities?

The provident fund manger for the organised sector, Employees' Provident Fund Organisation (EPFO), has been under pressure to invest in equities to earn higher returns for subscribers. But the fund, which manages around Rs 3,00,000 crore retirement corpus of nearly five lakh employees, has stonewalled every proposal. ET takes a look at the reasons why the fund invests only in high-quality bonds .

Obligation to declare returns every year

Unlike traditional funds, the EPFO has to declare annual returns, which is added to the accumulated corpus of the subscriber. Any drop in returns invites flak. EPFO , therefore, chooses to play safe and stay with toptier debt that has allowed it to give steady returns of 8.5% since 2005-06 and 9.5% in the current year. EPFO says the decision to invest in equities would have been easier if there was no obligation to earn a minimum return. In fact, this is the reason why the labour ministry has asked the finance ministry for a guarantee on capital and some minimum returns if it were to invest in equities.

Expert take

A valid argument, but EPFO could think of a reserve for the equities portion to smoothen out earnings from equities. A very small exposure will not cause too much volatility.

Very large number of low-income subscribers

A large number of subscribers of the EPFO are from the low-income group. Not only is the accumulated corpus very small, very often it is a substantial portion of their savings for retirement. It is not fair to risk this savings in equities, the EPFO says. The investors have the option of routing their personal investments in equities, ensuring that they have a good mix of fixed investments in through provident fund and potentially high discretionary savings in equities.

Expert take

Equities are risky in the short-term, not if investment horizon is over five years. Besides, EPFO could think of providing an element of choice, as is the case with the new pension scheme, to those investors who want a part of their provident fund contributions invested in equities.

Large redemptions

Unlike NPS , which keeps the deposits till retirement, subscribers are allowed to withdraw from the EPF for various purposes like education, buying of property or marriage. Every year the EPFO faces redemptions to the tune of about Rs 20,000 crore. So, returns have to be firm, or else if equities are down at the time of premature withdrawal, subscriber will get a raw deal.

Expert take

Withdrawal rules need to be tightened.

Source: Economic Times

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