EPFO hikes equity exposure: Will your EFP investment get you better returns going ahead?

NPS is completely linked to the market and investors can see what’s happening to their investments.

Buoyed by better returns from equity investments as well as to give higher returns to its subscribers in a falling interest regime, retirement fund body Employees’ Provident Fund Organisation (EPFO) is gradually increasing its equity market exposure. In fact, EPFO has already announced its plan to increase its investment into exchange-traded funds (ETFs) to 15% from the earlier 10%, which may be hiked further going ahead.

While this seems to be a good move by EPFO as it will allow it to earn higher returns on its investments, the question arises — will the EPF subscribers also be able to earn higher returns on their investment going ahead or will it be the same case as it is now?

“At first sight, EPFO increasing its equity exposure is a welcome move since it will allow generation of higher returns on the EPF corpus. Also, to guarantee more than 8% return year on year purely from the debt markets was becoming difficult for EPFO. Moving to equity means the probability of higher returns increases and will allow EPFO to offer better returns to its subscribers in the long run,” says Jitendra P S Solanki, CFP & Planner for Special Needs Member Families.

However, it is also true that managing fixed returns from a hybrid structure may be difficult. Currently such classification may be seen in monthly income plans (MIPs) — that usually invest around 15-25% in the equity market and the rest in the debt market. However, even MIP returns vary a lot during different market conditions. Investors who invest in MIPs know the risk-return very well and experience the volatility of returns on both sides.

“Now for EPFO giving fixed returns year on year derived from equity markets may not be viable as it is a highly volatile asset class. If it decides to do, then will we see a big variation in interest rates or EPFO will stick to a range, that’s the questions we need to ask. This query arises considering the returns equity markets can deliver. In fact, the yearly interest may have to be made variable to link it with equity markets returns,” says Solanki.

Contrary to this, NPS (National Pension System) is completely linked to the market where investors can see what’s happening to their investments. When someone considers equity investing, then one needs so much of transparency. NPS helps investors generate returns based on the returns being generated by equity and debt markets. We are already seeing 10% plus returns being generated. With that kind of returns, NPS seems to be a better option than EPF since one can have higher exposure to equity markets. Even post tax, returns from NPS may not be less than those being generated by EPF.

So, “I feel managing the EPFO corpus year on year may become difficult in the long run when there is high volatility involved. At one point the government did start a discussion of linking the EPFO returns with markets, but due to pressure from the unions the discussion was not pursued. But sooner or later this question will arise and that’s why I think NPS may be a better choice going forward,” says Solanki.

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