Financial Scene C.R.L. Narasimhan

PF money & stock markets

In this photo taken on Nov. 17, 2010, Indian Rupee notes of different denomination lie inside the cash counter of a retail shop in Mumbai, India. India has lost hundreds of billions of dollars over the past six decades as companies and the rich stashed cash overseas to avoid taxes and hide ill-gotten gains, widening inequality and depriving the poor of crucial resources, a new report showed. (AP Photo/Rajanish Kakade)

In this photo taken on Nov. 17, 2010, Indian Rupee notes of different denomination lie inside the cash counter of a retail shop in Mumbai, India. India has lost hundreds of billions of dollars over the past six decades as companies and the rich stashed cash overseas to avoid taxes and hide ill-gotten gains, widening inequality and depriving the poor of crucial resources, a new report showed. (AP Photo/Rajanish Kakade)   | Photo Credit: Rajanish Kakade

Even assuming that investment in equities is a done deal, care should be taken to educate the investor on the risks inherent in equity investment. In all cases, the subscriber should be given a choice.

An important development having a significant bearing on the size of the retirement funds most salaried employees covered by the Employees Provident Fund Organisation (EPFO) can expect to receive on their superannuation has gone practically unnoticed.

On April 23, the Union Labour Ministry through a notification permitted the EPFO to invest a minimum of 5 per cent and a maximum of 15 per cent of its incremental deposits in equity or equity-linked instruments. The percentages don’t look big. But by any other yardstick, the decision to allow equity investment by the EPFO is a far reaching move, and has to be viewed in the totality of circumstances. It is expected that investment in equities will commence very soon.

A spokesperson of the organisation has said that the equity investment at the end of this fiscal year will touch Rs.5,000 crore on the expectation that the incremental deposits will be of the order of Rs.1 lakh crore during this year.

Acrimonious debate

The decision has been arrived at after long and often acrimonious debates spread over several years. According to reports, even as recently as in March, the Labour Ministry and the unions had vehemently opposed the Finance Ministry’s proposal to permit equity investment. As far as the Labour Ministry is concerned, there has been a change in its stance. It is almost certain that it was not able to resist pressures emanating from the Finance Ministry and the numerous business groups which had for long clamoured for sizeable equity investments in the stock markets.

EPFO can do better as it is

The EPFO has around six crore members. Its corpus is estimated at Rs.8.25 lakh crore. Until very recently, the EPFO has been the sole agency handling the retirement funds of salaried employees. Its mandate has been to invest funds solely in instruments floated by central and state governments, thereby ensuring - at least notionally -100 per cent security for its subscribers.

Though accused of being inefficient, the EPFO has delivered steady returns - currently 8.75 per cent. Its critics fault it on two counts. For one, its accounting is extremely opaque - nobody knows whether it hides a big hole a la (the now defunct) US 64 scheme of the old UTI. For another, the returns that it has delivered are below what the markets can deliver.

While the last point is debatable, the fact remains that the returns are not sufficient to help the retired person lead a comfortable life. That of course is a much larger topic covering not only the salaried class but also the self-employed. The point has been made several times before that there are much larger sections which have no means to fall back upon.

That argument, however, should not rule out suggestions to make existing organisations such as the EPFO more productive.

The Union Budget has made investment in the EPF optional for salaried employees. The recently-introduced National Pension Scheme (NPS) is expected to be a worthy competitor .The fact that NPS is allowed to invest in equities, albeit in small amounts and that too only optionally (the subscriber is given a choice), is a major point in favour of the new scheme. The threat of competition might have spurred the government to arm twist the trustees of the EPFO into falling in line.

Stock markets sense an opportunity

Stock market participants, who have been salivating for a large chunk of equity, are not too disappointed with the relatively small percentage. For the permission to invest, by itself, is a big step forward. The cautious stand that the EPFO will adopt -capping investment at 5 per cent of incremental deposits, appointing professional managers, routing money through the relatively safe Exchange-Traded funds (ETFs) and so on - are only the beginning. Along with whatever the NPS’s fund managers can divert, the Indian stock markets have matured to receive retirement money.

In fact, the large portfolio and other investments that have come in from abroad including retirement is cited as proof that Indian authorities have so far been niggardly and out of step with the rest of the world.

That is a dangerous argument and should not hide the fact that equity investments are risky no matter how small their share in the total portfolio is. That equities will outdo debt in the matter of returns over the long run should not be convincing enough for a would be retiree to opt for an equity-laced retirement scheme.

In India, the EPF and the NPS are akin to social security.

For all their professed expertise, fund managers are yet to prove their worth over the long run.

There is a fear that by opening the door to equities, the government of the day might be able to influence corporate decisions. This apprehension will remain no matter what safeguards are taken at the beginning.

It is only over the medium term that such fears can be allayed.

A letter from the Editor


Dear reader,

We have been keeping you up-to-date with information on the developments in India and the world that have a bearing on our health and wellbeing, our lives and livelihoods, during these difficult times. To enable wide dissemination of news that is in public interest, we have increased the number of articles that can be read free, and extended free trial periods. However, we have a request for those who can afford to subscribe: please do. As we fight disinformation and misinformation, and keep apace with the happenings, we need to commit greater resources to news gathering operations. We promise to deliver quality journalism that stays away from vested interest and political propaganda.

Support Quality Journalism
Recommended for you
This article is closed for comments.
Please Email the Editor

Printable version | May 31, 2020 7:26:44 AM | https://www.thehindu.com/opinion/columns/C_R_L__Narasimhan/financial-scene-pf-money-stock-markets/article7414114.ece

Next Story