Sunday, August 16, 2015

Are you Excited about the EPF Investment into Stock Market?

Recently the government made a policy decision to allow the EPF Organization to invest in the stock market. Were you aware of this recent development? 

The purpose of this article is to understand the Why's and How's of this news...

Why did the EPFO choose the Stock Market?

Employee Provident Fund has been a staple investment option for Indians employed in the private sector for many years now. Though the rate of returns provided by EPF is a healthy 8-9% (varies slightly year on year - currently it is 8.7%) the fact that inflation in India is an average of 6% or more the remaining profit as such is a meager 2-3% isnt it? 

Everyone knows that the stock market can give superb returns in the long run and coupling it with the fact that most people stay invested in EPF for 10 years or more, it makes logical sense to have exposure to the equity markets to provide higher returns to its loyal subscriber base...

Where in the Stock Market is EPF going to invest and How Much?

As of now, EPF is going to focus only on Exchange Traded Funds that are linked to the major indices of India. They are going to select SBI Nifty ETF and SBI Sensex ETF both of which are managed by SBI Mutual Fund. For this year they plan to invest 5000 crores which is not even a drop in the overall EPF ocean. 

The EPF corpus is worth over 8.5 lakh crores. So, 5000 crores out of this is only a drop in the ocean isnt it?
On top of this, 5% of all incremental deposits from this year onwards will be directed towards investments in the stock market. There is actually a provision to invest up to 15% of the incremental EPF corpus in the stock market but EPFO wants to be conservative and has chosen to invest only 5%. I believe, if this works out well, EPFO would hike this investment % in the coming years. 
If you are curious, the incremental deposits each year into EPF is approximately 1 to 1.2 lakh crore...
This means, we can expect about 5,000 to 15,000 crores worth of investments each year into the stock market from EPFO. 

Is this a Good Idea?

Of course YES. EPFO is probably the only source of retirement corpus for most of the middle-income working class population of India. Exposure to equities can actually hike up the rate of returns which can help increase the retirement corpus size for everyone... 

On top of this, a consistent flow of thousands of crores worth of investment into the stock market can actually add a lot of stability to the Indian Indices. Even if there is a panic sell off due to some random event like a typhoon in the US, investment from EPF can actually be the load balancer to keep our indices stable. 

Am I Excited About this?

I am actually caught 50-50 right now. Though I am excited that EPFO is making its foray into the stock market, 5% of a corpus that is growing at over 1 lakh crores each year cannot really help much. 

Lets assume this years Incremental deposits into EPFO this year is 1 lakh crores. 95,000 crores of this goes into the usual safe investments that give 8.7% and the rest 5000 crores is going into the stock market. 

Returns from 95000 crores @ 8.7% = 8265 crores
Returns from 5000 crores @ 20% = 1000 crores
Total Returns = 9265 crores which works out to 9.265%. 
Even if the stock market investments grew at 20%, the actual hike in returns is only 0.565%. 

This is exactly why I am 50-50. If the amount invested was at least 20% the investment could actually help hike up the returns beyond the 10% mark. I understand why EPFO wants to take it slow and safe because this is the only retirement corpus for most of the middle-class Indians. However, if the benefits of this stock market investment are to reach them effectively, they have to gradually hike up the investment amount to at least the planned upper limit of 15%... 

Lets hope for the best..

What do you think? Sound off in the comments section below...

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