Good for EPFO members

Labour ministry has increased the limit to be invested in stock market to 10 per cent
Good for EPFO members
Good for EPFO members

One man's pain is another man's gain is an old saying. According to the current EPFO (employee provident fund organisation) rules, 5 per cent of the investible income is permitted to be invested in the stock markets through an ETF. This has gone up to 10 per cent as stated by labour ministry, which means Rs 13,000 crore or about will find way into the stock markets through the EPFO in 2016-17.

The move to increase the limit from 5 to 10 per cent has been a bone of contention for labour unions and leaders and in recent times the central board of trustees of the EPFO have not come to a consensus on this move. However, the labour ministry decided to go ahead with this higher sum to be parked in the markets. In an interview toOutlook Money, Labour Minister, Bandaru Dattatreya (link), had mentioned on the plan to increase the sum as the long-term benefits of investing in stock markets was there to see.

In times of lower interest rates and guarantees, the move is very good for members who are part of the EPFO who will stay with it over the next 2-3 decades, compared to those who have a few years to retire. At the moment, the fixed interest on the EPFO is 8.8 per cent, which is becoming difficult for the organisation to guarantee and stay at these levels for long. In comparison, the long-term return on the Sensex has been an average 16 per cent CAGR (compounded annual growth rate), which is about twice the current EPFO guarantee.

Yes, it is natural for those who are a few years from retirement to feel the discomfort of the EPFO funds going into equity markets, but, they ought to not harm the interest of members who have a long way to go with their monies in the EPFO. A way out for the EPFO is to make sure that the money that goes into the ETF is from fresh contributions and not being contributed by those who have been members for 20-25 years. It could also be only for members who are under 45 years old, who will have at least 15 more years to make contributions to benefit from the advantage of investing in equities for the long run. The move is also good for the stock markets as the higher defined inflows by the EPFO money will not only work like a super SIP for the markets, but will also be quality money that will stay invested for long period of time. This move by the labour ministry is definitely beneficial for young EPFO members.

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