The Hindu Business Line : EPF: Why investing in equity makes sense

What joy do people get in keeping others poor? That should be the question placed before the Central Board of Trustees who, on January 27, rejected the Finance Ministry's proposal to invest 5 per cent of the Employees' Provident Fund (EPF) money in the equity market. Presumably convinced that investing money in the stock market is risky and fraught with danger, the Trustees unfortunately were unable to decide on the fixed rate of return for the EPF's 40 million subscribers. They will meet again this month to decide on what to do next.

Not keeping pace with inflation

The little information that flowed into the press suggested that if the Trustees had recommended a 8.5 per cent rate of return, the implied Rs 7,824 crore payout would have left the corpus with a deficit of Rs 450 crore (money earned would be less than money to be paid out).

If the Trustees recommended a payout of 8 per cent, then the 40 million subscribers would get a total of Rs 7,364 crore and there will still be Rs 10 crore left in the kitty (money earned will be more than the money paid out). Hard choices where inflation is reported at 6 per cent; the actual increase in cost of living is probably closer to 9 per cent.

So, in the February meeting, the Board should consider that, since 1979, the BSE-30 Index has delivered an annual return of 22 per cent. The returns that the EPF has earned, at a fixed rate, are probably closer to 11 per cent per annum.

To put it more bluntly, a Rs 100 crore corpus invested in 1979 at a 11 per cent interest, with the interest being reinvested every year, would today be worth Rs 1,858 crore.

If that Rs 100 crore had all been invested in the BSE-30 Index, then it would amount to Rs 23,342 crore — that is right — 13 times what it would have earned in the fixed interest investments!

Now, if the sensible suggestion to invest 5 per cent of the total corpus in equities had been followed in 1979 and, for every Rs 100 crore of EPF money a modest sum of Rs 5 crore had found its way into the stock market, this judicious mix of investment (95 per cent in fixed rate investments and 5 per cent in equity) would be worth Rs 2,932 crores today — some 58 per cent (and Rs 1,074 crore) more than what a pure fixed income investment would have earned.

A 9.5% payout!

If EPF had followed the principle of diversifying its portfolio mix and owning various kinds of assets, including equities, the current debate would not be whether to distribute 8 per cent or 8.5 per cent. It could have declared a 9.5 per cent payout, and without running into a deficit!

For decades, crossing the seas was considered a dangerous and foolhardy adventure. For decades, India stayed insulated from the oceans of wealth around it. That is changing now and policy-making has begun destroying these taboos.

For too long now, the trustees of the wealth represented in EPF have ignored the factual evidence that suggests that investing in equities makes sense.

A desire to stick to some social dogmas that defy the history of facts and statistics of numbers has caused a loss to the 40 million beneficiaries on whose behalf the trustees must make decisions. May the February meeting begin destroying these financial taboos.

(The author is Director, Quantum Asset Management Company, and CEO, Quantum Advisors. He founded India's first independent equity research house in 1990.)

More Stories on : Insight | Social Security | Investments

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page