Is the increase in EPFO's equity exposure to 10% a reason to panic?
Given the long-term nature of EPFO's investments, it should help them earn better returns
By Research Desk | Oct 6, 2016
I read about the increase in the equity allocation of EPFO from 5% to 10%. What is the benefit as a member of EPFO? Does the government have any plans to distribute the wealth to EPFO? Is there a math to know how the wealth will be distributed? Should there be any reason to panic?
- Ajith K
There is no reason to panic about this move. According to the Finance Ministry's new norms, the equity exposure has been increased from 5% to 10% for the current financial year. This should help the organization generate better returns over the long run. The return on EPFO's equity investments had been 13.24% last year, as per the Finance Ministry. These returns, plus the effect of compounding over a period of time, will play a significant role in growing your retirement corpus which will be paid out to you when you retire. We believe equity investments with a long term horizon of more than 5-7 years should yield good returns.
The risk that critics talk about are based on the casual impression of volatility in equity investments. It's true that equities tend to be volatile in the short run. But the risk of losing money reduces tremendously over the long term, while offering the best return potential. Just look at the last ten years, as an example. Rs 1 lakh in invested EPF have increased to Rs 2.48 lakh. In contrast , Rs 1 lakh invested in a Nifty ETF have grown to approx Rs 3.9 lakh in the last decade, despite witnessing the worst financial crisis in a generation as well as a long period of stagnation. This is the kind of difference in returns that separates a 'prosperous' retiree from the one who struggles to make ends meet post retirement.