The labour ministry allowing the Employees’ Provident Fund Organisation to invest a small portion of its incremental flows in stocks is generating a lot of interest, but not necessarily the right kind. According to estimates, the incremental deposits of the EPFO for the FY 2016 could be around ₹100,000 crore. This translates to almost ₹5,000 crore of investment in equity. Stock exchanges view pension money as the next big trigger that can boost market volume. While foreign investors are arriving on Indian shores in droves, the number of domestic investors has shrunk.
The government, which has been struggling to sell its stake in public sector enterprises, has also been taking unusual interest in the EPFO; if some of these funds can be allocated to PSU stocks, its divestment programme can take wing. MF houses have been making noises about how the funds should not be restricted to only one kind of instrument (index ETF). They argue that returns can be higher if fund managers are given freedom to invest in stocks of their choice.
The new investment pattern allows the EPFO funds to be invested only in index ETFs that replicate the Sensex or the Nifty. This is a good idea since the benchmark indices have only the largest and the best companies in the Indian stock market. The EPFO should adhere to this investment plan and not yield to pressure to divert these funds. Investing in PSU stocks or PSU ETFs is a definite ‘no’ as these have grossly underperformed. The EPFO has taken its first step in equity investing. . Circumspection is the best policy, lest the EPFO scurries back into its shell of fixed asset investing.
Deputy Editor and Head of Research