<div><em>Salaried employees for the first time stand a chance to exploit the potential of equity asset class and reap its benefits, says<strong> Sunil Dhawan</strong></em></div><div> </div><div> </div><div><div>At last, the long awaited decision to make an employee’s savings work harder and generate high real returns has actually transpired. The Employee Provident Fund Organisation (EPFO) that manages about Rs 8.5 crore of the contributions (savings) of nearly 5 crore employee across the country has started investing EPF Corpus into equities.</div><div> </div><div>In an attempt to test equity-waters, EPFO has taken two decisions – One, not to invest directly into stocks but only though exchange traded funds (ETF) and secondly, to invest only 5 percent of its incremental corpus in this financial year. With an incremental corpus of about Rs 1 lakh crore, it’s expected that nearly Rs 5,000 Crore would be invested in ETFs this year. Not a substantial sum by market numbers, but a start certainly has been made. Starting 6th August, EPFO has started investing in two ETFs of SBI Mutual Fund namely, SBI ETF Nifty and SBI Sensex ETF in 75:25 ratio. </div><div> </div><div><strong>Why ETFs:</strong> Exchange traded funds (ETF) are similar to what a mutual fund is in terms of composition and portfolio. The units of ETF are however traded on exchanges and can be bought or sold anytime during trading hour. They typically mirror an index and hence returns are largely in line to that of the market. The cost too is lower in ETF as they are passively managed. The role of the fund manager is absent.</div><div> </div><div><strong>Why Equities:</strong> In order to beat inflation, it is imminent to generate high real returns in order to create wealth. Several studies in the past have shown that equities have delivered high inflation-adjusted returns over long term. A small difference in returns can bring about a huge impact on the final maturity corpus. Illustratively, if an employee contributes Rs 5,000 a month (at 8 per cent) towards his EPF account for 25-years, a mere 2 percent difference in return can generate a 40 per cent difference in corpus amount while in case of a 4 per cent difference, the corpus can be 98 per cent more! </div><div> </div><div>National Pension System (NPS), another retirement focussed investment available even for non-salaried investors have since inception generated an average return of about 12 percent per annum, even with an equity exposure of just 15 percent of its total corpus! The last ten years return too is around 12 percent for the market. Ajay Bodke, CEO & Chief Portfolio Manager - PMS at Prabhudas Lilladher Private Limited informs, “With pension funds having long term liabilities the investment horizon matches patient investing which delivers superior returns. The benchmark BSE SENSEX that represents bluest of blue chip companies has returned around 17 to 18 per cent CAGR over the last 35 years with the markets growing 6 to 7 fold every decade in 1980s, 1990s and 2000s.”</div><div> </div><div><strong>Till Now: </strong>The trade union bodies had for decades opposed any investment into equities and therefore the entire corpus found its way only into debt asset class such as the central and state government securities yielding a return in line with policy or the bank rates. The current rate for the year 2015-16 stands at 8.75 percent. The biggest drawback of investing in debt assets over a longer horizon is the low real returns i.e. returns adjusted to inflation. With inflation running close to 9 percent, the employees felt short-changed as real returns from EPF has always been low. Being a long term retirement-focussed scheme, the need for high yielding asset class was always felt. Bodke says, “It is a long overdue measure on the part of the Trustees of EPFO to invest a part of the assets in equities which have globally proven to be the highest yielding asset class over the long term.”</div><div> </div><div><strong>Now On: </strong>Then came the directive from the Labour ministry, notifying the new investment guidelines and allowing EPFO to invest in equities. The new investment pattern for EPFO allows it to invest in "shares of body corporates listed on Bombay Stock Exchange (BSE) or National Stock Exchange (NSE) which have market capitalisation of not less than Rs 5,000 crore as on the date of investment". According to investment norms, EPFO can also invest in mutual funds regulated by the Securities Exchange Board of India and which have minimum 65 percent of their investment in shares of body corporates listed on BSE or NSE. Bodke feels, “In fact by keeping away from investing in equities the Trustees have denied the employees of superior retirement benefits.”</div><div> </div><div><strong>The Pitfall:</strong> Investing in equities is associated with volatility too and hence a probability of losing principal amount. However, volatility tends to fall over long period of holding. The ideal way should be to route funds through SIP way rather than trying to time the market by doing a lump sum investment. On depressed market conditions, EPFO anyhow has a margin to go up to 15 percent of incremental corpus. Also, EPFO needs to install proper hedging mechanism to keep the risks under control. As of now, both of SBI MF ETF’s are prime index funds. EPFO also needs to diversify across other indices and sectors to better manage funds. When it comes to saving for retirement, one needs to make full use of equities. </div><div> </div><div><strong>The end note:</strong> It’s time to take your EPF account on a serious note now. Remember, the take-home salary that you get is net of your contribution towards PF. Instead of funds lying in debt-assets, the government has opened up the equity-route for your retirement savings. Now, when an employee is busy working hard for a living, he is sure that his retirement funds too are working hard to generate a decent return.</div></div>
