Employees Provident Funds to invest 15% in Equity

Employees Provident Fund (EPF) to invest 15% in Equity

EPF is the one of the most commonly used scheme by the employees of India to save for their retirement regularly.

Recently, the Finance ministry has asked EPFO to invest up to 15% of EPF in Equity. But well, in exchange of that, the EPF commissioner asked for the government guarantee that the stock price won’t go down.

"Our Board of Trustees felt investments in the capital market are unsafe and do not serve well for someone like us who want very stable returns," Central Provident Fund commissioner, Samirendra Chatterjee, told reporters on the sidelines of a function organised by AK Capital Services in Mumbai.
"If they want us to invest, please give us a guarantee for the same, we will invest," he added.

Giving such kind of guarantees is not at all possible in the capital markets. However, the purpose of the finance minister is clear. By investing 15% corpus of EPF in the equity, it will help to boost the returns of the employees saved money in the long run as equity provides the highest returns in the long run.

The EPFO and the company-run PF trusts are currently allowed to invest only in more secure investments like bonds and Government securities which deliver a stable return.

Unfortunately, the inflation in India is right now so high (8-14%) that the fixed income instruments are not that much secure. They will give you just the psychological feeling that the value of the fund will go high and high.

But well, the inflation will erode the purchasing power of your money put in the EPF over the time. Just think that your EPF generates 8% annual return from you while the inflation is 12%. In that case, your purchasing power is reducing by 4% every year even though you are gaining 8% every year ‘On Paper’.

I personally feel that for such a long time horizon investments, Equity exposure is a MUST.