ET Wealth | How safe is your EPF money? | Economic Times

With interest rates declining steadily, most investors believe a small exposure to stocks can boost their retirement savings. Almost 61% of the respondents to an online survey said that some portion of their Provident Fund should be invested in equities for higher returns. While 25% were not sure if equity exposure would help, only 14% did not want the Provident Fund to invest in risky assets. The online survey was conducted by ET Wealth last week and received 4,753 responses from subscribers to the Employees’ Provident Fund (EPF).The survey findings validate the 2015 decision of the EPFO to invest EPF money in stocks. It started by investing 5% of fresh inflows in index ETFs from August 2015. This was raised to 10% of inflows in 2017 and later to 15% in 2018. Currently it invests almost Rs 2,200 crore (or 15% of total monthly contributions) in ETFs every month.EPFO’s maiden foray into equities initially proved bountiful, but got a rude shock in March this year. The market crash wiped out almost 30% of the estimated Rs 1.1 lakh crore of EPF funds invested in equities. Even though the equity portion accounted for only 5-6% of the total portfolio, the sharp fall in stock prices pulled down the overall return, raising questions whether the EPF would be able to give the 8.5% interest recommended by the EPFO for 2019-20.Should EPF invest some portion in equities? 78201899Mercifully for EPF subscribers, the markets have bounced back. Last week, the EPFO announced that it would give 8.15% interest this month and the remaining 0.35% by December. This comes as a relief for the 5.8 crore subscribers of the EPF, but larger questions remain about the way the gargantuan corpus of about Rs 18 lakh crore is managed.Be ready for rate cutsThe equity exposure was necessary because interest rates have declined in the past few years. The 10-year government bond yield is now below 6%. But EPF interest rate continues to be 135-150 basis points above what other debt instruments offer. This could change in the coming years.To be fair, a significant 70% of EPF subscribers realise that the high interest rates offered by the scheme are not sustainable. One out of three subscribers even thinks that a rate cut is imminent. Others are not so pragmatic, though. Almost 18% believe that if the rate falls below 8%, there will be a political backlash against the government while 12% are living in the hope that labour unions will not allow such a steep cut.What if the Provident Fund rate falls below 8%? 78201914Accounting for equitiesThough equity exposure can help boost returns, the fundamental problem is the way the EPFO accounts for the equity investments. Unlike mutual funds and the NPS, the EPF corpus is not unitised and the value of investments is not marked to market. This works fine when you invest only in debt instruments and announce a rate based on the interest income earned during the year. But when you invest in volatile instruments, the corpus must be NAV-based.Almost three years ago, in November 2017, a unitisation plan was announced under which ETF units would have been credited to individual accounts. But this is not workable because holding ETFs would require opening demat accounts for 5.8 crore EPF members.Should Provident Fund be market-linked and declare a daily NAV? 78201941The Rs 25 lakh crore mutual fund industry is very closely monitored by the regulator, especially after the recent Franklin Templeton imbroglio. Mutual funds are supposed to not only declare their portfolios every month but also e-mail the factsheet to investors. Sebi has now asked debt mutual funds to start doing this every 15 days. They must also mention the yields of individual holdings. Of course, it goes without saying that all funds are supposed to declare NAVs daily.Compare this with the veil of secrecy behind which the Rs 18 lakh crore EPF operates. The last EPFO annual report on the official website pertains to 2016-17. There is no way to know how big the corpus is and where it invests.This opacity helps the EPFO get away with questionable investment decisions. For instance, its investments in the CPSE ETF and Bharat-22 ETF have been disastrous but nobody is questioning it. A majority of respondents to our survey want greater transparency in EPF investments. More than 50% want it to be made market-linked and declare a daily NAV.Desire for greater controlMore than transparency, investors want greater control over their retirement savings. Instead of a one-size-fits-all approach, individuals should be allowed to decide their allocation to equities. Sure, 61% are okay with 15% of new contributions flowing into equities. But their willingness to take risks should not override the concerns aired by the 14% who don’t want any equity exposure.Who should decide the asset mix of the Provident Fund? 78201965The EPFO should take a leaf out of the NPS book, where individual investors can choose their asset mix based on their own risk perception and profile. For individuals who are not very savvy, there can be auto choices similar to the three lifecycle funds of the NPS. There can be a safe plan with no exposure to stocks, a conservative plan with 25% exposure, a hybrid plan with 50% in equities and an aggressive plan with 75% in stocks. The NPS manages this beautifully by progressively reducing the equity exposure every year.What are your expectations from retirement savings? 78202007More than 40% of the respondents say that individuals should decide the equity exposure of their Provident Fund. Another 21% want it to be linked to age. There is also a sizeable 29.5% who trust the EPFO will make the right decision. Less than 9% want the government to take that call on their behalf.(The online survey was conducted on 11-13 Sept and received 4,753 responses)