The EPFO has started investing in equity, but unless there is a drastic change of plan, it won't benefit members
10-Aug-2015 •Dhirendra Kumar
So, at long last, the EPFO is going to start investing in equity. Sort of. I say sort of because the equity investment is utterly minimal. Under pressure from the Finance Ministry, and faced with the example of just about every other pension fund in the world, the EPFO will now invest in equity.
There have been three kind of reactions to the EPFO's little toe dip into equity. One, there are those who have warned that all savings will soon disappear now that the EPFO has started gambling. Two, there are those who feel that equity investments will transform EPFO and finally enable savers to get the kind of returns they need on their retirement kitty. And three, there are those who think that equity investment in EPFO is a great idea but what is being done now is too late, too little and too slowly.
I wish that the second case above was true, but I know that's just wishful thinking. Equity investments are commencing and during the year five per cent of this year's incremental investment of about ₹1 lakh crore will be in equities. The total corpus is ₹8.5 lakh at the beginning of this year, and based on the trend over the last few years, will likely be about ₹9.7 lakh crore by March 2016. At that point, the equity investment of ₹5,000 crore will amount to 0.5 per cent of the corpus. Yawn.
Extrapolating from the last few years' trend, even if the EPFO doubles inflows, its proportion of the total corpus could stay well under five per cent of the corpus for five to ten years. Frankly, as far as the potential benefit to EPFO members goes, this is not worth talking about. The ultimate purpose of bringing in equity should be to enhance returns so that the retiree can get reasonable real (inflation adjusted) returns. Unless the equity part rises to about 10 per cent of the total corpus, it's impact will be irrelevant to that goal.
Unfortunately, even under the most aggressive projection that is being talked about, that could take forever. And I do mean forever, because the equity inflows plus fairly optimistic returns may well be lower than or equal to the growth of the non-equity part. Therefore, unless there is a huge revolution in what the guardians of the EPFO think about equity, neither the hopes of the equity supporters, nor the dire warnings of the equity haters will come true for a long time.
What will happen is that the equity markets will benefit from the steady inflows, which is all good, but was hardly the point of the exercise.