Under pressure from diminishing returns on its debt holdings, the Employees’ Provident Fund Organization of India (EPFO) is reportedly considering a proposal to invest more money in equities. The Finance Investment and Audit Committee wants the cap on stock investments by our state-run retirement funds to be raised to 25% incremental inflows (from 15% in two phases); The trustees of EPFO will consider it later this month. This comes soon after the finance ministry approved a payout slash of 40 basis points for 2021-22. Subscribers of this statutory plan will get 8.1% on their balance, which was 8.5 percent a year ago. While this may cause some heartburn among those relying on PF savings for old-age protection, the majority of the 50 million-odd of its total are likely to feel that it is still a better rate which is less risk-averse. The savings made today can be found elsewhere. -rate economy; Banks can’t pay almost anything. Since being heavily dependent on debt makes it difficult for the EPFO to sustain premium payments, a large portfolio of stocks – as with pension funds globally – is seen as the answer. In principle, this is true. But let’s not hurry.
While returns from debt may fail to beat inflation, especially if held to maturity without churn, and equities can actually provide a boost, it requires specialized skill sets that we don’t know. EPFO has received so far. It began in 2015 with a 5% equity limit, which was raised to 15% in 2017, but the performance of its portfolio remains a mystery, as it only covers broad surplus numbers (it has been huge in recent years). ) in front. Until this ambiguity is removed, it would be unwise to proceed. In general, employees who have a slice taken from their pay for the fund need to be better informed. The concern stems not only from doubts over the ability to choose assets that maximize value, but also from potential conflicts of interest arising from the government’s own agenda (such as disinvestment), as seen by other states. Seen with proprietary entities, whose purchases often reflect goals. So far, the equity portion of the fund is reported to be held through specified exchange-traded funds. It seems relatively safe. But what is needed is full disclosure, all told in advance, to be tracked. Otherwise, it shouldn’t be a large part of our nest-egg subject to stock market uncertainties. These are ups and downs too, let’s not forget it.
Security should remain the core promise of any such fund. Therefore, the EPFO should keep the investment risk within the limits of that assurance. Still, the yields it produces for customers can’t continue to fall. Undoubtedly, a premium rate could distort our credit market by attracting discretionary savings that banks could lend for more productive purposes. Lenders have a valid complaint about deposits being funded by PF top-up and other high-paying government schemes. But a recent top-up limit has limited this effect. Furthermore, while this clearly interferes with the efficacy of India’s monetary policy in a lax mode (as the rate differential widens and banks lose savings), the relatively high PF rewards should not bother if banks raise interest rates. have been April inflation around 8% and the central bank’s projected path of rate hike would argue for higher PF payments for 2022-23. This will also lead to a jump in rates of small savings schemes, a pool that is partly used to meet the Centre’s fiscal deficit. So this is yet another reason to pay more. With bond prices falling and yields rising this year, the EPFO’s challenge is to achieve this through debt instruments.