Such a decision would be very short-sighted and devoid of any logic. It is true that equity returns cannot be guaranteed and they can often be negative over the short run. But the long-term returns from equities consistently beat those from every other class of financial instruments. In the past 10 years, for instance, the Nifty and Sensex have both produced compounded annual returns of over 12.5 per cent, beating debt hollow. The return from equity is always positive if a broad, diversified basket (such as a major market index) is held for a long period and the risks are considerably reduced if the instruments are of companies with proven track records. Pension funds such as the EPFO are ideally suited to invest in equity and indeed, pension funds around the world often have 30 per cent or more of assets in equity. Pension funds handle long-term cash with very predictable inflow and redemption rates. They don't have to juggle sudden surges in redemption, unlike mutual funds. Nor do they face asset-liability mismatches inherent to banks, which manage demand deposits and short-term funds. Therefore, they can afford to invest in long-gestation equity assets.
Apart from this, there is a strong theoretical argument for diversification. As of now, the bulk of the EPFO's assets (over 99 per cent) is parked in debt instruments of several types. It is also wrong to assume that debt is entirely safe. For one thing, the nominal rate of return is often lower than the prevailing inflation rate. There is also the fear of defaults, which can ripple through the financial system. Given the very high proportion of non-performing assets or NPAs and restructured assets in the banking system, the risks are exceptionally high at present. One constraint the EPFO faces is that it offers a mandated rate of return and for political reasons, that rate is set unrealistically high. That should be reviewed since it is a long-term recipe for disaster. There are multiple examples of the stresses that under-funded pension plans with guaranteed returns cause to government finances.
The EPFO must continue to invest in equity-backed instruments, increasing its exposure and diversifying away from debt. It should do so with due prudence, picking highly rated assets (such as the index ETFs it holds) with the intention to hold such assets for the very long term. Expressing dissatisfaction with the returns just three months after dipping its toes into the equity market betrays an alarming lack of understanding of how this instrument works.