Your provident fund (or EPF) is not just invested in debt instruments. If you have read my post on Where is your EPF money invested, you will know that EPFO can invest up to 15% of its contribution flows in equities.
Your provident fund (or EPF) is not just invested in debt instruments. If you have read my post on Where is your EPF money invested, you will know that EPFO can invest up to 15% of its contribution flows in equities.
Now, they are planning to further increase the limit to 25%. We will discuss what is the meaning of this and the EPF 25 rule and what it means for investors. But the reason for this planned move is simple. Just recently, EPF rates have been cut to historic lows of 8.1%. And given the low rate environment for several years now, the retirement body is struggling to reach its targets. So to bridge the shortfall in returns with investment in debt, the Employees’ Provident Fund Organisation (EPFO) is weighing a proposal to raise its investment limit in equities to as much as 25% of incremental flows.
By the way, don’t think that EPFO invests in stocks or mutual funds directly. The EPFO invests in equities through Exchange Traded Funds (ETFs) tracking the Sensex and Nifty operated by SBI & UTI AMCs.
Before August 2015, EPF money did not have any equity component. The equity ETF investments were started by EPF only from August 2015 onwards. Initially with 5% of the incremental annual investments. In September 2016, the allocation was increased to 10% and then again in 2017, it was further raised to 15%.
It should be remembered that the new 25% limit (if it gets approval) will be applicable only on fresh accruals (contributions coming in) to the fund. It is not that 25% of the total EPF corpus will be invested in equities. As a simple example, assume the total EPF corpus in the country is Rs 10,000. Now, every month via salary deductions, EPFO gets fresh incremental flows of Rs 100. So the 25% limit is for Rs 100 monthly flow and not the entire Rs 10,000 corpus.
So since before 2015, EPF was a pure debt thing, the impact of a higher equity component on returns will be felt only after a few more years. That too if the quantum of equity investments as a percentage of total EPF corpus goes up substantially.
To be fair, the intent of EPFO is based on the premise that historically, equity is the only reliable (though volatile) option to beat inflation in the long term. And since EPF by definition is a long term product, equity might help its cause of generating inflation-beating returns. But on the other hand, EPF is a risk-free rock-solid debt product at the individual portfolio level for investors. And asset allocation within the product hasn’t been much of concern till now. But as equity allocation of EPF corpus increases, this question will demand some answers. But maybe, that’s a discussion for later years and not now.
By the way, if the equity investment limit does get the approval to be raised to 25%, then that would mean that EPFO can potentially invest up to Rs 3000 crore monthly in equities or stock markets in India. That will be another helpful support for markets in addition to regular SIP flows in India (currently about Rs 11-12,000 crore monthly).
Related Readings on EPF –