Skip to main content

Part of EPF will be invested in Equity

 Soon, within this month in fact, the Employees' Provident Fund Organisation (EPFO) could begin investing in equity assets. This should be a turning point in the history of the EPFO. If implemented properly, equity returns could well be the change from dooming EPFO beneficiaries to old age poverty to enabling decent returns on retirement savings. I wish I didn't have to start that sentence with an 'if', but more on that later.
 

According to what the labour ministry (which manages the EPFO) has said, equity investments will commence in July and the equity exposure will gradually go up to five per cent by the end of the financial year. According to the finance ministry's new norms, five per cent is the minimum equity exposure that EPFO must have. This can go up to a maximum of 15 per cent.

 

As one would expect, there is no shortage of people who are loudly proclaiming that the government is forcing EPFO to gamble away the hard-earned savings of crores of employees. Writers of news stories seem spoiled for choice when they look for the apparently obligatory quotes from trade unionists and left politicians on the terrible fate that awaits retirees now that EPFO will start doing 'satta' with savings.

 

While one can't expect anything else from this lot, I'm surprised at how widespread the underlying sentiment is. From the fear mongering that is going on, one would think that that the EPFO will immediately deploy its entire corpus to leveraged day trading in derivatives. In fact, I actually came across an article on this issue from an otherwise balanced publication with the hashtag #financialderivatives!

 

That's an extremely misleading piece of misinformation. The small amount of equity exposure that EPFO funds will have are limited to Exchange Traded Funds (ETFs) which mimic a market index. ETFs share none of the high-risk characteristics of derivatives. In any case, this name-calling always avoids the main point of the logic of equity investing for PF funds.

 

The return offered by the EPFO is far too low to give any kind of realistic return over and above the inflation rate. Constrained by the fixed income investment mandate, the returns have barely kept pace with inflation. When you take rising prices into account, fixed income returns are the worst form of retirement savings. They ensure, without any doubt whatsoever, that the saver will just get back the actual value that he or she invested, without any gains whatsoever.

 

The risk that critics talk about are based on the casual impression of volatility. Equities may be volatile, but over any investment over a few years, the volatility gets more than compensated for by returns. Take the last ten years, for example. One lakh rupees in EPF have increased to R2.48 lakh. However, one lakh rupees in a Nifty ETF would have been R3.9 lakh rupees. Do note that these ten years have seen the worst financial crisis in a generation as well as a long period of stagnation. This kind of a difference between returns would make the difference between a saver starting retired life in prosperity versus always struggling to make ends meet.

 

But of course, this is not actually going to happen. The actual quantum of equity exposure is utterly useless. The norms say that the EPFO must invest between five and fifteen per cent of incremental investment in equity ETFs. No assets will be taken out of fixed income and then redeployed into equity. At this rate, it could take a decade or more (depending on the rate of withdrawal and the differential between equity and fixed-income returns) for the equity exposure to reach five per cent or more. And even then, a five per cent exposure is the worst of both worlds.

 

When the equity markets drop, the usual suspects will cry themselves hoarse about the losses, but when the markets rise, the tiny exposure to equity means that gains that are meaningful to savers will be hard to come by. Equity exposure will not serve the purpose unless it is at least in the 30 to 50 per cent range. That might sound like sacrilege in the context of the EPFO, but equity exposure of that scale is already available in some of the plans of the National Pension System (NPS). And that actually points to the logical solution to India's retirement savings mess--dissolve the EPFO and merge it into the NPS.

Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015

1.ICICI Prudential Tax Plan

2.Reliance Tax Saver (ELSS) Fund

3.HDFC TaxSaver

4.DSP BlackRock Tax Saver Fund

5.Religare Tax Plan

6.Franklin India TaxShield

7.Canara Robeco Equity Tax Saver

8.IDFC Tax Advantage (ELSS) Fund

9.Axis Tax Saver Fund

10.BNP Paribas Long Term Equity Fund

You can invest Rs 1,50,000 and Save Tax under Section 80C by investing in Mutual Funds

Invest in Tax Saver Mutual Funds Online -

Invest Online

Download Application Forms

For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call

---------------------------------------------

Leave your comment with mail ID and we will answer them

OR

You can write to us at

PrajnaCapital [at] Gmail [dot] Com

OR

Leave a missed Call on 94 8300 8300

---------------------------------------------

Invest Mutual Funds Online

Invest Any Mutual Fund Online

Download Mutual Fund Application Forms from all AMCs

Popular posts from this blog

Am you Required to E-file Tax Return?

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Am I Required to 'E-file' My Return? Yes, under the law you are required to e-file your return if your income for the year is Rs. 500,000 or more. Even if you are not required to e-file your return, it is advisable to do so for the following benefits: i) E-filing is environment friendly. ii) E-filing ensures certain validations before the return is filed. Therefore, e-returns are more accurate than the paper returns. iii) E-returns are processed faster than the paper returns. iv) E-filing can be done from the comfort of home/office and you do not have to stand in queue to e-file. v) E-returns can be accessed anytime from the tax department's e-filing portal. For further information contact Prajna Capit...

Mutual Fund Review: HDFC Index Sensex Plus

  In terms of size, HDFC Index Sensex Plus may be one of the smallest offerings from the HDFC stable. But that has not dampened its show, which has beaten the Sensex by a mile in overall returns   HDFC Index Sensex Plus is a passively managed diversified equity scheme with Sensex as its benchmark index. The fund also invests a small proportion of its equity portfolio in non-Sensex scrips. The scheme cannot boast of an impressive size and is one of the smallest in the HDFC basket with assets under management (AUM) of less than 60 crore. PERFORMANCE: Being passively managed and portfolio aligned to that of the benchmark, the performance of the index fund is expected to follow that of the benchmark and in this respect, it has not disappointed investors. Since its launch in July 2002, the fund has outperformed Sensex in overall returns by good margins.    While every 1,000 invested in HDFC Index Sensex Plus in July 2002 is worth 6,130 now, a similar amount invested in Sensex then wo...

IDFC - Long term infrastructure bonds - Tranche 2

IDFC - Long term infrastructure bonds What are infrastructure bonds? In 2010, the government introduced a new section 80CCF under the Income Tax Act, 1961 (" Income Tax Act ") to provide for income tax deductions for subscription to long-term infrastructure bonds and pursuant to that the Central Board of Direct Taxes passed Notification No. 48/2010/F.No.149/84/2010-SO(TPL) dated July 9, 2010. These long term infrastructure bonds offer an additional window of tax deduction of investments up to Rs. 20,000 for the financial year 2010-11. This deduction is over and above the Rs 1 lakh deduction available under sections 80C, 80CCC and 80CCD read with section 80CCE of the Income Tax Act. Infrastructure bonds help in intermediating the retail investor's savings into infrastructure sector directly. Long term infrastructure Bonds by IDFC IDFC issued an earlier tranche of these long term infrastructure bonds on November 12, 2010. This is the second public issue of long-te...

ULIP Review: ProGrowth Super II

  If you are interested in a death cover that's just big enough, HDFC SL ProGrowth Super II is something worth a try. The beauty is it has something for everybody — you name the risk profile, the category is right up there. But do a SWOT analysis of the basket, and the gloss fades     HDFC SL ProGrowth Super II is a type-II unit-linked insurance plan ( ULIP ). Launched in September 2010, this is a small ticket-size scheme with multiple rider options and adequate death cover. It offers five investment options (funds) — one in each category of large-cap equity, mid-cap equity, balanced, debt and money market fund. COST STRUCTURE: ProGrowth Super II is reasonably priced, with the premium allocation charge lower than most others in the category. However, the scheme's mortality charge is almost 60% that of LIC mortality table for those investing early in life. This charge reduces with age. BENEFITS: Investors can choose a sum assured between 10-40 times the annualised premium...

Section 80CCD

Top SIP Funds Online   Income tax deduction under section 80CCD Under Income Tax, TaxPayers have the benefit of claiming several deductions. Out of the deduction avenues, Section 80CCD provides t axpayer deductions against investments made in specific sector s. Under Section 80CCD, an assessee is eligible to claim deductions against the contributions made to the National Pension Scheme or Atal Pension Yojana. Contributions made by an employer to National Pension Scheme are also eligible for deductions under the provisions of Section 80 CCD. In this article, we will take a look at the primary features of this section, the terms and conditions for claiming deductions, the eligibility to claim such deductions, and some of the commonly asked questions in this regard. There are two parts of Section 80CCD. Subsection 1 of this section refers to tax deductions for all assesses who are central government or state government employees, or self-employed or employed by any other employers. In...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now