Should You Increase Your Equity Allocation In Your EPF Account?

In the last few years, EPF (Employee Provident Fund) accounts have undergone important structural shifts. The equity allocation, for one, has gone up. EPFO rules mandate that up to 15% of its 10 trillion-plus corpus can be invested into ETF's (Exchange Traded Funds).

Recent reports suggest that the EPFO may be in the process of setting up a new system that would allow its investors to take a higher exposure than the presently mandated 15% limit, and this would be discretionary.

Presently, the increased 15% limit means precious little, as the EPFO is yet to properly implement its two-tiered structure to track returns from realised gains on its ETF units. Technological hurdles abound, and its unlikely that the government-led behemoth will be nimble enough to move quickly on this front.

So, what happens to the money that you've invested until now? Until the system is formally implemented, the equity investments made from your money by the EPFO are being held in a 'pooled investment'. Regardless of the pro-rated portion of your corpus that's allocated to equities, the rate declared on the entire corpus (8.55% for the last fiscal) will apply to your entire corpus.

Once the system is implemented, and the equity corpus is liquidated, the gains thus accrued would be reflected in the interest rate in the year of booking these profits and be passed on to investors in this manner.

Coming back to the original question - should you increase your exposure to equities within your ETF's, if the option comes up some time in the future? The answer would depend upon three things - the time left to your retirement, the nature of your other retirement savings instruments, and the actual modus operandi of the equity allocation itself.

If you're less than 3 years from your retirement, do not increase your exposure to equities within your EPF account. If you're 3 to 5 years away, you may consider a total exposure of 30% to 40% to ETF's within your EPF account. If you've got more than 10 years to go before you hang up your work boots, you could go as high as the new rules will allow - the higher, the better.

Many people use EPF's to balance out other, aggressive retirement saving investments. For example, you may be running a monthly SIP of Rs. 50,000 into mid cap oriented mutual funds, towards your retirement. If that's the case with you, you may want to avoid increasing the equity allocation within your EPF account, so that your overall asset allocation remains balanced in terms of risk.

The third deciding factor would be the nature of the ETF investments themselves. If the planned investments are into index linked ETF's, that's good. If the EPFO decides to invest into highly concentrated ETF's that only invest into a handful of stocks, and behave more like sectoral funds than anything else, you should think twice before deciding to increase your equity allocation. Take for instance, the CPSE Exchange Traded Fund that was launched last year amidst much fanfare - it's turned out to be a poor performer across time frames.

All in all, it's a wait and watch game right now. One needs more clarity on the actual modus operandi before deciding whether or not it would be worthwhile to increase their equity allocations within their EPF accounts.