Ramesh Pathania/Mint
Ramesh Pathania/Mint

You may get more stocks in your provident fund account

Flexibility to choose equity exposure above the cap of 15% is good for subscribers of Employees' Provident Fund, but a few transitionary hurdles remain before they can do so

The Employees’ Provident Fund Organisation (EPFO) may allow its subscribers a greater say in increasing or decreasing their equity exposure. But does that make sense for investors who are used to a simple product? 

Since 2015, a part of the money you invest in PF goes into equities through exchange-traded funds (ETFs), a basket of stocks that track an underlying index and are traded on stock exchanges. 

Between August 2015 and February 2018, the EPFO invested around Rs41,968 crore in equities and gave a notional return of 17.23%, according to a press statement released after the meeting of the central board of trustees on 13 April. In FY18, EPFO invested 15% of its incremental corpus in equities. 

While a part of your money is being invested in equities, your individual gain is difficult to assess as EPFO still hasn’t implemented the methodology to track and calculate equity returns.

While allowing greater flexibility is good for investors, some experts feel it might complicate an easy-to-understand product. Further, EPFO needs a systemic change in order to account for equity investments and that’s a tough task for the authority. 

In 2015, EPFO decided to invest in equities to improve long-term returns. It started by putting 5% of the incremental corpus in ETFs and gradually increased the limit to 15% by FY18. However, in the absence of a methodology to realise equity gains, these were only notional. 

It took around two years for EPFO to devise a methodology to track equity investments. As per the methodology, EPF subscribers will have two accounts: a fixed income account in which interest will get credited each year like it happens now, and an equity account in which the subscribers will be able to see the units they hold at the prevailing net asset value (NAV).

But implementation will take time. “Moving to the system of managing two accounts will need a major software update and we are hoping to get ready with that in about four months," said V.P. Joy, central PF commissioner, EPFO. “Our incremental corpus comprises subscriber contribution and redemption and interest income. Only subscriber’s contribution will get unitised and credited into their individual account; rest of the units will be held by EPFO," he added. Read more about the methodology at bit.ly/2JotRx6.

The fact that EPFO is yet to implement the new system raises an important question: what will happen to the money invested in equity so far? “Right now, it’s EPFO’S pool investment. We will have to manage the equity portfolio till liquidation, and the gains will be reflected in the interest income of the respective year of accrual and will be passed on to subscribers as interest," said Joy. Until the new system kicks in, this interest rate will apply to the entire EPF corpus regardless of how much was invested in equities. 

Unitizing the corpus will entail a huge transition cost, said Amit Gopal, senior vice-president, India Life Capital Pvt. Ltd, an investment advisor . “There is the peril of cross subsidization, as not everyone benefits from equity investment of the past. The government wants to allow portability between EPF and National Pension System (NPS). That will be a better model to give equity exposure to retirement funds," he added.

Another challenge will be updating systems. “Even now subscribers are not using digital means to communicate or transact. EPFO needs to focus on that first because unitizing the corpus depends a lot on the digital strength of the organisation," said Madhu Damodaran, head-legal operations, Simpliance.in, a labour law compliance software firm.

Exposure to equities for a long-term fund is good. What’s better is that EPFO plans to allow subscribers to choose their equity exposure well above the cap of 15%.

“The flexibility to alter equity allocation is good especially for high income earners as their EPF corpus can add up to a huge sum when they retire. It allows for asset allocation as per one’s requirements. Plus, investing through ETFs prevents fund manager’s risk," said Suresh Sadagopan, founder, Ladder7 Financial Advisories. 

“The caps on how much flexibility we offer and other modalities will get worked out once the system is up and running and after seeing subscriber interest," said Joy. 

Also, it’s important to maintain complete transparency, said Sadagopan. “ETFs that replicate Sensex and Nifty are highly recommended. But I wouldn’t recommend a higher exposure if the money is invested in PSU ETFs because allocation is based on ownership and that’s undesirable as the government is a poor allocator and manager of business. So subscribers should be given transparent information," he added. 

“EPFO has a small exposure to PSU ETFs," said Joy.

While moving to equities is good for EPF investors, a few transitionary hurdles remain before this can happen smoothly. Watch this space for updates.