Briefing EPFO Members About Investing In Stocks and Mutual Funds

Given the fact that the financial market players, including Mutual Funds and those promoting other instruments, which find way into equity or debt schemes are mandated by the regulator, Sebi, to give clear disclosures about subscribers’ investments being subject to market risks, the Employees Provident Fund Organisation (EPFO) should also be making similar disclosure to its six crore members, along with details about EPFO deductions on their salary slips.  

But is such a disclosure printed on your salary slip?  You would find no such disclaimer even though the EPFO recently sunk or almost sunk close to Rs 1200 crore in the defunct IL&FS and embattled housing finance firm DHFL. No EPFO member has been given any information about this loss or near-about loss. 

Employees in the organised sector have this great comfort of getting 8.65 per cent annual interest on their EPFO corpus which have a great power of compounding. 

The EPFO is now allowed to invest up to 15 per cent of its incremental pool into stock market through professional fund managers. Something like Rs 55,000 crore has already been invested by this organisation, which has a basic mandate of providing economic security to employees in the organised sector, on retirement or even before retirement.  Conventionally, the EPFO has been investing in government securities and organisations owned by the government with a great amount of focus on security of employees' funds. But as the pressure of maintaining annual returns became difficult to manage in the falling interest rate scenario, the government in its wisdom thought it fit to let EPFO also partake the risks and benefits of the stock market, albeit up to 15 per cent of its corpus, though there has been immense pressure to take this limit further up. 

As the stock market is all about risk capital, risk is inevitable even for the EPFO money. It is perfectly okay as long as the owners or members of the EPFO are given these disclosures and are properly briefed about the risks. Besides, those not choosing the risk capital route must be given an alternative mode of safer investment.   

There are reports about the government proposing a change in the law that would enable EPFO to segregate the employees' contribution into an equity and fixed income buckets.  So, a maximum of 15 per cent of the member's contribution could be invested in the equity, which would work like a Mutual Fund allocating units with Net Asset Values.  Even today   at least 15 per cent of the EPFO corpus is subject to market risks, since its professional fund managers are investing the same in a highly volatile market but the subscribers are not informed in a clear term. 

Good part is that the EPFO has a huge fund of Rs 11 lakh crore and its investment in the equities is, so far, limited to Rs 55,000 crore. The total of about Rs 1200 crore going toxic or dead can be absorbed but that should be enough to sound a caution, if not alarm. After all, there is a growing clamour by the day by the powerful brokerage firms, mutual funds, market - dedicated TV channels to increase the EPFO threshold for equity exposure from the existing15 per cent. In fact, a weird suggestion has also come about as to why the EPFO money cannot be invested in the ' Start Ups’.  This ''smart'' set of financial advisors and commentators have started describing 'Start-Ups' as an " asset class''. Who knows, they may even succeed in convincing the regulators and the government to usher in '' reforms'' about creating a carve - out of ''asset class'' for the Start-Ups which can be ''multi-baggers'' for investors. To state it in simple terms, even this discourse is dangerous for hard-earned retirement funds of middle class employees.  

Then a question arises as to what are the safe avenues for investing the EPFO contributions which should compound well giving a reasonable return? . The problem is : there are not too many avenues left either. Every other person in the financial market the common refrain is '' Long -term'' but the ground reality is the opposite when it comes to investment channels for EPFO and other such funds, looking for assured and safe returns.  There are not government-owned developments financial institutions left for lending to the long-gestation projects in roads, ports, airports. These institutions could be great channels of long-term investment for even the insurance companies including the Life Insurance Corporation of India. 

In a way, the LIC is facing a similar dilemma with so much of policyholders' funds without really finding safe avenues for investment. For every other balance sheet in India Inc facing trouble, there is a real crisis for long -term financial institutions which are custodians of the middle class Indians who do not have much of social security, any ways.  

Institutions like LIC have become easy targets for bailing out the government's disinvestment programs, troubled banks like IDBI Bank. Besides, its own misjudgement on equity funds has raised concern about quality of its assets. A similar problem could arise for the EPFO; after the end use of all this money is into assets both in the public and private sector, which are becoming toxic. The basic model of raising and deploying long-term finance is missing, ironically in a country, which needs huge sums of long-term money into building infrastructure. 

The government is even talking about investment of Rs 100 trillion into infrastructure. If at all it is serious about this ambition, a sustainable, safe model of public investment should be in place under supervision of a high quality and independent regulator. Only then, subscribers of EPFO, insurancy policyholders would be safe and be expecting a reasonable return on their long-term savings.  

 The author is a New Delhi based journalist