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Saturday, 27 June 2015 00:00
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Santosh's edit

Investing in index funds will help improve yields

 

With finance minister Arun Jaitley announcing, in the Budget, that employees would have the option to choose between the Employees’ Provident Fund (EPF) and the New Pension Scheme (NPS), it was clear the former would have to change its ways. Even today, it is true, the EPFO has benefits the NPS doesn’t, whether by way of tax exemptions or by way of the fat commission it is allowed to charge subscribers. The NPS, however, was a strong contender, not just by way of its vastly superior returns, but also by way of the service it offered. The EPFO, by contrast, has R30,000 crore of subscribers funds locked up—once you factor this in, the returns it offers fall even further; the NPS, on average, has delivered annual returns of 11% since its inception. Over the past year, the EPFO’s service has improved a little—subscribers have, for instance, been given a Universal Account Number that will remain the same as they move jobs. An attempt has been made to reconcile dormant accounts and to quicken the pace of transferring funds from one account to another as employees switch jobs, but the scope for improvement is considerable.

Over the years, there have been several proposals to get the EPFO to invest at least a part of its corpus in equity to improve returns for subscribers. The EPFO’s trustees, however, have always turned it down. With the labour minister announcing that the EPFO will now be investing in stocks—only in index funds for now—clearly the EPFO bureaucracy has realised that if it does not increase returns, subscribers will start deserting it. Starting with 1% of incremental deposits, it will go up to 5% by the end of the year—that means around R5,000 crore will be invested in the capital markets. Over a period of time, it could go up to an even higher proportion. Given that index funds have given annual returns of 10-14% over the past 5 years, the sooner this is done the better. Indeed, the EPFO will need to start offering individual subscribers more flexibility in the same manner that the NPS does. Government employees who are members of the NPS can opt for investing up to 15% of their subscription in equity while that proportion is 50% in the case of the private sector—the government employees’ share will also be raised to 50% soon. At some point, as recommended by the GN Bajpai committee, the NPS—and the EPFO—will also have to move away from index funds to allowing subscribers to opt for active fund management of their portfolios.

 
 

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