The decision of the labour ministry to invest a portion of the Employees’ Provident Fund in the equity market is timely. The finance ministry had been repeatedly suggesting over the last few years that a small part of these funds be parked in stocks to improve returns and increase market volume. But this idea could not be implemented due to stiff opposition from labour unions which perceive stocks as risky investments that could erode the retirement savings of investors. But if the EPFO continues to invest only in the current basket of fixed income assets — Central and State government securities, special deposit schemes and bonds issued by the public and private sector and financial institutions — it will find it hard to retain the payout of 8.75 per cent interest it has paid out in the last two fiscal years. There is no denying that the EPFO is doing its best to better investor return, despite its restrictive mandate, by engaging the services of four portfolio managers including the State Bank of India and ICICI Securities Primary Dealership. But even these professional fund managers will find it difficult to ensure a high return given that the interest rate cycle has reversed lower. The G-sec yield is currently down to 7.7 per cent and is expected to decline further over the next one year; the EPFO parks almost 24 per cent of its funds in these instruments.

The portfolio managers could be forced to invest in bonds with higher risk to improve returns. In such a situation, investing 5 per cent of incremental flows in the stock market, as suggested by the labour ministry, is not such a bad idea. Around ₹5,000 crore is expected to be invested in stocks every year if the suggestion is implemented. This forms just 1 per cent of the total corpus of the EPFO of around ₹4,70,000 crore. The ministry has also suggested that the investment will be made in index-based exchange traded funds, which means that the money will be parked only in bluechips. In short, there are enough safeguards against the erosion of investor wealth.

While the EPFO has served its purpose well in the past, catering to the more conservative investment approach of the seventies and eighties, those in the workforce seem more willing to invest their retirement savings in high-return and ipso facto higher risk assets. The Centre’s intended proposal to make a one-time offer to all account-holders to shift from EPF to the National Pension System — where the investor can choose to invest up to 50 per cent of his savings in equity — is a good one since the asset allocation choice rests with the individual in the NPS. But it must create a level playing field for NPS by exempting the amount received at maturity from tax.

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