EPFO may raise equity investment limit to 25%
EPFO is considering allowing employees with higher salaries to route 25% of their PF contribution into stocks, while retaining the 15% cap for low-income employees
New Delhi: Up to a fourth of your contribution to the employees’ provident fund (EPF) may go into equities if a plan being considered by the country’s retirement fund manager bears fruit.
Currently, the Employees Provident Fund Organisation (EPFO) invests 15% of contributions in equities and the rest in debt.
According to two people aware of the matter, EPFO is considering allowing employees with higher salaries to route 25% of their PF contribution into stocks, while retaining the 15% cap for low-income employees.
“We have discussed the proposal a couple of times in recent months. In the next finance and investment advisory committee meeting, the issue will be taken up again,” said Prabhakar Banasure, a member of the committee. “The choice is a logical requirement in investment decisions,” he added.
If the proposal takes effect, this will be a departure from the EPFO’s one-size-fits-all policy for investing retirement savings of millions of subscribers.
The rethink comes as provident fund subscribers are seeking better returns even as returns from debt investments remain low.
The move, if its goes through, will also help EPFO take on competition from the National Pension System, which allows subscribers to invest up to 50% of their savings in equities.
The second of the two people cited earlier, who declined to be named, said that since many EPFO subscribers are not familiar with the stock market, increasing their equity exposure may not be advisable.
“Hence this differential equity treatment proposal,” this person added.
EPFO started investing in equity through exchange-traded funds from August 2015. It started by investing 5% of contributions, and has since raised it to 15%. The rest go into debt market instruments such as government securities, private sector bonds and bank fixed deposits.
EPFO has annual accruals of over Rs1.2 trillion and has total assets under management worth Rs11 trillion.
Of its 50 million active subscribers, official estimates suggest that around 75% earn up to Rs15,000 a month. But it’s the rest who contribute the bulk of the retirement fund manager’s annual savings corpus.
As of January 2018, EPFO has an equity exposure of Rs44,000 crore. Greater equity exposure may will also mean more domestic funds in the stock market, a sweetener for a market which is already on a high for the past couple of years.
Every month, EPFO subscribers contribute 12% of their basic salary as a mandatory EPF contribution to build a retirement corpus, with a matching 12% contributed by employers.
“Debt market, going forward, may not give us the best returns and increasing equity exposure may help beat the shortfall. A well-earning subscriber thinks of creating a retirement corpus which will offer better inflation-adjusted return in the long term; here, 25% exposure could be a good starting point,” the second person said.
“The low-income employees may continue to invest 15% in stocks and the rest in debt and continue to get a stable assured return without taking a risk. With time, EPFO needs to evolve as an asset manager,” he added.
“In long-term financial asset allocation, we advise clients to take up to 60% equity exposure. As an asset manager, EPFO needs to think aggressive. It has to give choice to its subscribers. That’s the need of the hour,” said Jitendra P.S. Solanki, a certified financial adviser.
“Low-income subscribers, however, should not be exposed to a higher equity risk as they are not financially literate enough. You give them the choice of assured return and well-earning subscribers a different choice. This 15% exposure for all needs to change and I believe it will only go up,” Solanki added.
The second person cited above said equity had given better returns over the last two-and-a-half years—over 16%, compared to less than 8% from the debt market.
In fact, EPFO booked a profit of over Rs 1,000 crore earlier this month, allowing it to buffer its earnings shortfall and potentially maintain the 8.65% interest payout in 2017-18, Mint reported on 12 February.
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