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Hope and despair

When it comes to the EPF and PPF, Indian savers seem unshakeable in their beliefs. And that needs to change

Hope and despair

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As a principle, I don't like talking about investments of which I do not have a personal experience. However, in the case of the EPFO, I have no choice. Since I became an entrepreneur straight out of college, I have not been a member of the EPFO and nor am I likely to ever become one. Still, I do have to deal with the EPFO from a different angle because eligible employees of Value Research are members of the EPFO, as required by the law. In some ways, this makes my views of the EPFO even stronger than they would have been had I been a member.

Our previous MFI cover story titled, 'Why EPF will fail you in retirement' might have made some of you angry. In fact, I had expected a certain amount of hostility on social media, just as I faced when I once wrote that tax-saving mutual funds are a better option than the PPF.

The reason is simple - Indian savers are EPF + PPF fundamentalists. They may be less knowledgeable or more, they may take everything at face value or they may critically analyse everything they are told, but when it comes to the EPF and PPF, they seem unshakeable in their beliefs. The idea that the EPF and PPF are the ultimate ideals of safe retirement savings and everyone must put their money in them unquestionably is one of the centrepieces of their world view of money matters.

This idea is wrong. There's no point saying it politely, or in some softened manner. Of course, we have dwelt on the investment aspects of EPFO - the deficiencies in the service aspect (even though they are decreasing now) would be known better to the readers themselves.

In fact, those of you who are opposed to our criticism of the EPFO should consider a further problem with it, which is in some ways deeper. We all know, at least the community of Value Research readers does, that fixed-income investments are better for the short term and equity investments are better, much better, for the long term. If you expect your EPF kitty to look after your retired life, then you have to face the harsh fact that the kind of returns that the EPFO generates means that its members are heading for old-age poverty.

To be fair, the EPFO is doing something about this by introducing equity into the investment mix but that's too little and too slow. EPF equity is 15 percent of incremental flows, which is nothing in the aggregate. It will also stay at an irrelevant level for a long time to come. In contrast, the NPS is doing the right thing by having an option with equity of up to 75 per cent.

Actually, it's quite an irony. NPS, which is the option basically meant for government employees, has adequate equity, while EPF, which is meant for the private sector, is locked in the mindset of the socialist era.

The question is, will this ever change? It's easy to be pessimistic but a lot of things in this country have been changing under this government. The idea of the EPFO having any equity at all had been under discussion for about a decade before it finally got done in 2015. My hope is that at some point, we will see a huge reform and the EPFO will be transformed into an NPS-like structure. It sounds unlikely but, as I said, a lot of once-unlikely things are getting done. Maybe this, too, will.