What if you decide how much of your PF money goes to equity

Ronak MorjariaWay2Wealth BrokersEPFO (Employee’s Provident Fund Organisation) has started investing in Equities for the first time from 6th August, 2015. Labour Ministry has decided that EPFO will invest 5 per cent of its incremental corpus in equities via ETFs (Exchange Traded Funds) route, which sums to approximately Rs.5,000 to Rs.6,000 crore in the current financial year. This move is taken with the aim of earning higher returns on the accumulated provident fund corpus and pass on the incremental returns to the account holders to some extent by providing a higher rate of interest on the EPF account. Till now, EPFO used to invest only in government securities, treasury bills / notes and corporate bonds; so overall 100% across debt instruments. EPF can be classified as defined contribution plan, where the contribution to the fund is defined as fixed percentage of your salary (Basic + Dearness Allowance). Globally, in countries like US, such defined contribution plans have different investment options across different asset classes, where the employee can choose in which asset class he wishes to invest the contribution towards provident fund; just like we have an option to choose between government securities, other fixed income instrument and equities under NPS (National Pension Scheme). In such plans investment risk has to be borne by the employee, since he decides in which asset classes and in what proportions would the contributed funds will be invested. Let us consider a hypothetical example, where 24 years old Yash takes up a new job after his post graduation. As per his salary structure, his contribution to EPF is Rs.1,000 per month and equal contribution by the employer, summing to Rs.2,000 per month. Assuming, Yash works for next 35 years (i.e till age 59 years), with same contribution of Rs.2,000 towards EPF irrespective of his salary hike and job switch; he would be able to accumulate approximately Rs.19 lakhs. Given an option under EPF of investing in Nifty / Sensex Index Fund where the average returns would have been approximately 12% p.a., his EPF corpus would have grown to approximately Rs.37.6 lakhs. You can see the difference between the two numbers; where 4% p.a. additional return over 25 years would have earned double the corpus though for which he would have taken high amount of risk. Historically equity as an asset class has always been an outperformer beating the inflation rate significantly over long term (i.e 10 years or above) compared to other asset classes like gold, real estate or debt (fixed deposits, bonds, etc). Average 10 year SIP return in Nifty has been approximately 16% - 17%. EPF is a long-term investment, with poor liquidity. So, given an option an employee can opt to invest his contributions to equity, keeping in mind long-term investment horizon and the risks associated with it in order to earn higher returns.So, if EPFO would invest the contributions of the employee in equity on his behalf, he would be able to accumulate a higher retirement corpus from EPF contributions and thus live a better retired life. Though this carries high risk but in turn is rewarded with higher returns as well. I wish labour ministry to soon take such initiatives for the social security of the employee and thus benefit them for a happy retired life! The views expressed here are his own.