 "Moving out of equities will hurt EPFO investors")
It is not easy being an equity investor. There are times when one can make money within months, but at other times one might have to wait for months or even years to make money.
For example, if someone had invested in the BSE Sensex in January 2008, the capital would have eroded by over 50 per cent in the very first year. But over a 10 year-period, the index's compounded annual rate of growth has been 10.66 per cent, whereas the average consumer price inflation index has been 8.43 per cent. Clearly, investors have made a good two per cent plus real returns over the decade by investing in the BSE Sensex.
In comparison, the Employee Provident Fund Organisation (EPFO) has paid 8.75 per cent rate of return on provident fund deposits for the two consecutive years in 2013-14 and 2014-15. The rate for 2015-16 is yet to be declared. And the average returns from PF have been 8.65 per cent in the past decade, barely beating the average consumer price inflation.
He also points out that the department may come under pressure because they have to declare an annual rate and sometimes, if the returns from equity suffer, they run the risk of having to dip into their capital to give the promised returns. However, given that the department is investing only five per cent of the incremental collections - just about Rs 2,300 crore in the past four months - the impact of the lower returns from equities will be quite nominal.
Also, the money that comes into the EPFO is mostly for the long term. According to existing tax laws, if someone withdraws before five years, there will be three kinds of taxation - one, the aggregate of employer's contribution to PF and interest earned on it will be taxable as salary.
Two, the extent of the deduction claimed by you under section 80C of the Income Tax Act on your own contribution shall be taxed as salary. Three, the interest earned on your own contribution to PF shall be taxed as "income from other sources". In other words, there are enough deterrents for employees not to withdraw the money that they have contributed to the provident fund.
Financial planners believe that since the amount deposited with EPFO is forced savings and serves as a major contributor to the retirement kitty, investment in equities for the long term is the way to go. "The EPFO should put as much as 15-20 per cent of the kitty in equities, even if it is only in Nifty and Sensex stocks, because it will earn them good long-term returns and give a boost to retirement corpus of its members," says a fund manager.
Given the fact that there is a parallel system of National Pension System (NPS), which is already investing in exchange traded funds, depriving a large section of employees from equities exposure will hurt them and their retirement corpus.
For example, if someone had invested in the BSE Sensex in January 2008, the capital would have eroded by over 50 per cent in the very first year. But over a 10 year-period, the index's compounded annual rate of growth has been 10.66 per cent, whereas the average consumer price inflation index has been 8.43 per cent. Clearly, investors have made a good two per cent plus real returns over the decade by investing in the BSE Sensex.
In comparison, the Employee Provident Fund Organisation (EPFO) has paid 8.75 per cent rate of return on provident fund deposits for the two consecutive years in 2013-14 and 2014-15. The rate for 2015-16 is yet to be declared. And the average returns from PF have been 8.65 per cent in the past decade, barely beating the average consumer price inflation.
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In such circumstances, employees who are putting money in the EPFO should be worried. Recently, labour unions expressed reservations about investments in stock markets in view of an annualised return of 1.52 per cent on such investment during the August-October period. While the Central Board of Trustees is yet to decide the future course, any decision to move out or stop investing in equities will only hurt long-term investors in this instrument. Says financial planner Gaurav Mashruwala: "It is too soon for EPFO to decide on the equity investments because equities need time to deliver."
He also points out that the department may come under pressure because they have to declare an annual rate and sometimes, if the returns from equity suffer, they run the risk of having to dip into their capital to give the promised returns. However, given that the department is investing only five per cent of the incremental collections - just about Rs 2,300 crore in the past four months - the impact of the lower returns from equities will be quite nominal.
Also, the money that comes into the EPFO is mostly for the long term. According to existing tax laws, if someone withdraws before five years, there will be three kinds of taxation - one, the aggregate of employer's contribution to PF and interest earned on it will be taxable as salary.
Two, the extent of the deduction claimed by you under section 80C of the Income Tax Act on your own contribution shall be taxed as salary. Three, the interest earned on your own contribution to PF shall be taxed as "income from other sources". In other words, there are enough deterrents for employees not to withdraw the money that they have contributed to the provident fund.
Financial planners believe that since the amount deposited with EPFO is forced savings and serves as a major contributor to the retirement kitty, investment in equities for the long term is the way to go. "The EPFO should put as much as 15-20 per cent of the kitty in equities, even if it is only in Nifty and Sensex stocks, because it will earn them good long-term returns and give a boost to retirement corpus of its members," says a fund manager.
Given the fact that there is a parallel system of National Pension System (NPS), which is already investing in exchange traded funds, depriving a large section of employees from equities exposure will hurt them and their retirement corpus.