There is good news for over five crore subscribers of retirement fund body EPFO. Soon they may have an option to increase or decrease investments of their provident fund into stocks through exchange-traded funds (ETFs) in the current fiscal. In its last meeting, the Central Board of Trustees decided to explore the possibility of granting an option to increase or reduce equity allocation to subscribers contributing through ETF above the 15% cap.
The Employee Provident Fund Organisation (EPFO) had started investing in ETFs from investible deposits in August 2015. In FY16, it invested five percent of its investible deposits, which was subsequently increased to 10 percent in FY17 and 15 percent in FY18. However, subscribers were not at all pleased with this increase in exposure to equities. There were some who didn’t want to risk their retirement corpus built through the EPF route. While other subscribers were keen to increase exposure to equities for better returns in the long-term.
So, what advice do financial experts have for EPFO subscribers looking to increase their exposure to equities through the ETFs route when the option is opened up?
Who should increase or reduce investments in ETFs?
Several investors are not reasonably patient with their active investments and panic when they see volatility in the market. Chenthil Iyer, a Sebi registered investment adviser and author of ‘Everyone Has an Eye on Your Wallet! Do You?’ said these investors generally invest only in fixed deposits and post office schemes. “For such investors, increasing the equity exposure through EPF route may be a good option as it is a passive mode of investing and ensures a long-term commitment.”
For investors who manage their active investments and have a well-diversified portfolio, Iyer recommends a minimum equity exposure.
Arvind Laddha, Deputy CEO, JLT, has a word of caution. “In the past, there have been negative returns for consecutive two-to-three years or even more from equity markets and this could compromise the savings of EPFO subscribers which they are not used to.”
As not all investors understand the risk of equities and their volatile nature of returns, Kalpesh Mehta, Partner at Deloitte India, feels an investor should also consider one’s age, risk appetite, financial obligations and total net worth before increasing exposure to equities through ETFs.
Benefits of increasing investments in ETFs
Here are the benefits of increasing investments in ETFs through EPF contribution as explained by Amit Gopal, Senior Vice President, India Life Capital: 1) Regular monthly SIP because of mandatory contributions; 2) Inexpensive as employees (contributors) don’t have to pay fund management fees in the current model of EPF; and 3) Tax advantages on contributions. To this, Colonel Sanjeev Govila, CEO, Hum Fauji Initiatives lists institutional framework taking care of selection and research of equities while investing.
Drawbacks of increasing investments in ETFs
Gopal highlights drawbacks such as insufficient administrative track record, illiquidity associated with a retirement fund product, absence of choice in fund manager and products.
To this, Iyer cautions, “Putting the responsibility of equity exposure of this fund on the individual may expose it to the vagaries of the individual’s risk perception, leading to possible over-exposure.”
Make EPF more investor friendly
EPF needs to be investor friendly with additional facilities of enhancing and reducing equity allocation which is likely to be made available in the coming two-to-three months. Iyer feels periodic electronic statements should be mailed to the subscribers which clearly mentions the amount and number of units available in ETF.
“Further an automatic mode of distributing the contribution into equity and debt should be made available based on the age of the individual just like NPS.” This, he feels, will ensure minimum manual intervention in decision-making with regard to equity exposure.
According to Goyal, while EPFO have described some methods of passing on returns, nothing concrete has been implemented. “It is unclear how they will ford the system and governance challenges that could arise.”
It would therefore be good if these issues are resolved before increased allocation and employee choices are implemented. An investor needs to keep a track of this developments for their own benefit.
Leverage on existing options instead of duplicating efforts
The whole theme of EPFO providing these choices to increase and reduce equity exposure is a case of duplication of effort and design. Financial experts are advising investors to leverage existing options.
“The NPS already provides the same structure and benefit. Integrating it with the EPFO and permitting portability is a more efficient way of enhancing employee choice. NPS already has the architecture and track record of administering an employee choice model,” Gopal added.