EPFO (Employee’s Provident Fund
Organisation) has started investing in Equities for the first time from 6th
August, 2015. Labour Ministry has decided that EPFO will invest 5 percent of
its incremental corpus in Equities via ETFs (Exchange Traded Funds) route,
which sums to approximately Rs.5,000 to Rs.6,000 crores in the current
financial year. This move is taken with the aim of earning higher returns on
the accumulated provident fund corpus and pass on the incremental returns to
the account holders to some extent by providing a higher rate of interest on
the EPF account. Till now, EPFO used to invest only in G-Secs, Treasury Bills /
Notes and Corporate Bonds; so overall 100% across debt instruments.
EPF can be classified as defined
contribution plan, where the contribution to the fund is defined as fixed
percentage of your salary (Basic + Dearness Allowance). Globally, in countries
like US, such defined contribution plans have different investment options
across different asset classes, where the employee can choose in which asset
class he wishes to invest the contribution towards provident fund; just like we
have an option to choose between G-Sec, other fixed income instrument and
equities under NPS (National Pension Scheme). In such plans investment risk has to be borne
by the employee, since he decides in which asset classes and in what
proportions would the contributed funds will be invested.
Let us consider a hypothetical
example, where 24 years old Mr.Yash takes up a new job after his post
graduation. As per his salary structure, his contribution to EPF is Rs.1,000
per month and equal contribution by the employer, summing to Rs.2,000 per month.
Assuming Mr.Yash works for next 35 years (i.e till age 59 years), with same
contribution of Rs.2,000 towards EPF irrespective of his salary hike and job
switch; he would be able to accumulate approximately Rs.19 lakhs. Given an
option under EPF of investing in Nifty / Sensex Index Fund where the average
returns would have been approximately 12% p.a., his EPF corpus would have grown
to approximately Rs.37.6 lakhs. You can see the difference between the two
corpuses; where 4% p.a. additional return over 25 years would have earned
double the corpus though for which he would have taken high amount of risk.
Historically equity as an asset
class has always been an outperformer beating the inflation rate significantly
over long term (i.e 10 years or above) compared to other asset classes like
gold, real estate or debt (fixed deposits, bonds, etc). Average 10 year SIP
return in Nifty has been approximately ~16% - 17%. EPF is a long-term
investment, with poor liquidity. So, given an option an employee can opt to
invest his contributions to equity, keeping in mind long-term investment
horizon and the risks associated with it in order to earn higher returns.
So, if EPFO would invest the
contributions of the employee in Equity on his behalf, he would be able to
accumulate a higher retirement corpus from EPF contributions and thus live a
better retirement life. Though this is carries high risk but in turn is
rewarded with higher returns as well. I wish Labour Ministry to soon take such initiatives
for the social security of the employee and thus benefit them for a happy
retired life!
