Interest rates have come down in the last few years. Therefore investment in equity was necessary. The 10-year government bond yield is still below 6 percent. However, the interest rate of EPF remains 1.35-1.50 percent interest from other debt instruments. In the coming years, it …
Interest rates are declining rapidly. Most investors feel that a small investment in stocks can increase their retirement savings. In an online survey of ET, about 61 percent people said that some money of their provident fund should be invested in shares for more returns. At the same time, 25 percent were not sure that this would help much. Only 14 percent believed that provident funds should not be invested in risky assets. This survey was done by ET last week. The responses of 4,753 people were taken in it. All these employees were subscribers of the Provident Fund.
The results of the survey confirm the EPFO’s 2015 decision to invest EPF money in shares. The Employees Provident Fund Organization (EPFO) started investing 5 per cent of new investment in index ETFs from August 2015. In 2017, it was increased to 10 per cent of inflows. It rose to 15 percent in 2018. Currently, the organization invests around Rs 2,200 crore (or 15 per cent of the total monthly contribution) in the Exchange Traded Fund (ETF) every month.
Initially, EPFO’s decision to invest in equity proved to be extremely beneficial. But, in March this year, it received a big setback. Investing in equity in the market downturn became almost 30 per cent clear of the estimated 1.1 lakh crore rupees of EPF funds. However, the share of equity in the total portfolio was only 5-6 per cent. However, the sharp fall in share prices dragged down the total returns. This led to questions whether the EPF would be successful in paying 8.5 percent interest. The EPFO had asked to pay this much interest for 2019-20.
It was good for EPF members that the market jumped again. It is slowly approaching the level before March. Last week, EPFO announced that it will give 8.15 percent interest this month and the remaining 0.35 percent interest in December. This is news of relief for 5.8 crore subscribers of EPF. But, the big question remains about the way the huge amount of 18 lakh crore rupees is managed.
Be ready for rate cut
Interest rates have come down in the last few years. Therefore investment in equity was necessary. The 10-year government bond yield is still below 6 percent. However, the interest rate of EPF remains 1.35-1.50 percent interest from other debt instruments. This may change in the coming years.
It is reasonable that 70 per cent of EPF subscribers feel that the higher interest rates coming from the scheme cannot continue for a long time. One in three subsidiaries even think that it is possible to cut the interest rate. However, others are not so practical. Around 18 per cent feel that if the rates fall below 8 per cent, the government will face political pressure from opposition parties. While 12 percent are hopeful that the Labor Union will not allow this to happen.
Equity has to be kept in mind,
though investment in equity can be helpful in increasing returns. But, the basic problem is how the EPFO takes equity investment into consideration. Unlike mutual funds and NPS, the EPF amount is not made a unit. Nor is the investment value marketed to market. This works fine when you invest only in debt instruments and declare the rate on the interest income earned during the year. However, when you invest in a volatile instrument, the corpus should be NAV based.
About three years ago in November 2017, a unitization plan was announced. Under this, the units of ETFs were to be credited in separate accounts. However, it could not be carried forward. The reason was that in order to hold the ETF, 5.8 crore EPF members had to open demat accounts.
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After the recent Franklin Templeton incident, the regulator is closely monitoring the Rs 25 lakh crore mutual fund industry. It has become necessary for mutual funds to declare their portfolio every month. Not only this, they also have to email the factsheet to the investors. SEBI has now made it mandatory for debt mutual funds to do this every 15 days. They also have to disclose yield on individual holdings. Needless to say that all funds have to be given NAV everyday.
Now compare this to the ways under which the EPF’s 18 lakh crore rupees are managed. The EPFO’s last annual report on the official website is linked to 2016-17. There is no way to know how large the amount is and where it is invested.
This opacity protects the EPFO from questioning investment decisions. For example, its investment in CPSE ETF and Bharat-22 ETF has been very poor. However, no one is raising questions. In our survey, more people want more transparency in EPF investment. More than 50 percent want it to be market-linked and to declare NAV daily.
More
transparency than control, investors want more control over their retirement savings. Instead of one thing being applied to everyone, people should have the freedom to decide their allocation in equity.
EPF should take lessons from NPS. Investors can choose asset mix based on their risk profile in NPS. Investors who are not very fast in this case can be given the option of auto choice like NPS. Such a safe plan can be made in which there is no investment in shares. In Conservative Plan, 25% investment should be made in equity. 50% of the investment in hybrid plan and 75% in aggressive plan should be in shares. NPS manages this thing very beautifully. It reduces the equity investment with each passing year.
40 per cent of the survey said that the decision to invest equity in their provident fund should be given to the people. Another 21 percent want it to be linked with age. There are 29.5 percent people who believe that EPFO will take the right decision. Less than 9 percent people want the government to take this decision on their behalf.
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