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 Increasing the equity portion in EPF would be the most pro-employee move possible

Contents News/Article  Date:  22nd August 2022 

Relating to which  Act:   The  Employees Provident Funds & Miscellaneous Provisions Act, 1952

Type:   Newspaper Item – review done by ET on increasing the equity portion in EPF 

Pertains to    Employers and Employees,                                            

Relevance of this news:  Karma Global Consulting Solutions Pvt. Ltd has been in the business of  Payroll, Outsourcing, and Regulatory Compliances from its inception in 2004 and since then,  has brought in a lot of efficiencies and technological upgradations with experts on its roll, to ease the hassles of Payroll Processing, Temp Staffing On-boarding Management, Regulatory and Payroll compliances by providing customized solutions to all its elite clients.

Now Karma Global is also fully into labour compliances for nearly 18 years and is helping both establishments and workers for the fulfillment of obligations as per the laws of the land.  It has over 200 staff, both direct and indirect on its rolls and operates on a Pan India basis.  Recently, it has diversified into foreign shores, into countries like the US, UK, UAE, Canada, Philippines, and Asia for handling payroll, outsourcing, recruitment, and governance.

Karma has been maintaining payroll and payroll-related compliances for hundreds of its clients wherein, it also takes care of PF, ESI, PT, and LWF.  The team at Karma manages the contributions and challans of all its clients on a monthly basis and by this, there are crores of deductions that are remitted to the EPFO.  The PF Department in return for holding such amounts credits the interest earned to the members on an annual basis.  To provide for this interest, the EPFO in turn makes investments in various funds.  It started by investing a small portion in equity funds and each year, the portion of equity investment has been growing.  As per the newspaper item, a review has been made on the portion of plowing funds in equity and you can read through this for knowledge and understanding.


Subject:  Increasing the equity portion in EPF would be the most pro-employee move possible

For greater details, appended below is the complete news item 



Increasing the equity portion in EPF would be the most pro-employee move possible

The debate over whether or not the Employees’ Provident Fund (EPF) ought to make investments in equity is successfully over. 

A few days back,   data about EPFO investments were tabled in the parliament.  The headlines stated that complete investments in equity of Rs.1.59 lakh crore had grown to Rs.2.27 lakh crore, yielding a gain of Rs.67,619 crore. That sounds nice, however, it doesn’t let you know a lot about the precise charge of return these investments generated, which is what we have to know. 


Remember, the debate is about whether the additional equity is worth the additional risk

To conclude, one needs the annualized rate of return for both parts. Knowing the rate of return for the fixed part is easy—it’s likely to be between 6.5 and 7.5%. Equity returns are tougher because detailed inputs are not in publicly released data.

To determine this, on the basis of some incoherent assumptions and calculations,  the ballpark returns for the equity part.  From the launched data, we all know the complete investments for 4 intervals. Rs.39,662 crore for 2015-2019, Rs.31,501 crore for 2019-20, Rs.32,070 crore for 2020-21, Rs.43,568 crore for 2021-22 and Rs.12,199 crore for the first three months of 2022-23. For every one of those intervals, it is assumed that the investments had been divided into equal month-to-month installments, SIP type. For the latter 4 intervals, that is in all probability fairly correct. However, for 2015-19, the month-to-month investments had been doubtless, not equal however growing.

This implies that the assumptions will doubtless depress the guessed returns however let’s go along with that for the moment. Given these assumptions, supposing a   spreadsheet is created placing annualized charge of return was 13.6%. Not unhealthy, particularly as a counterweight to the fixed income part’s anemic returns. The precise returns are more likely to be considerably greater. A slightly different methodology that allows for increasing monthly investments in 2015-19 (which certainly happened) results in returns of about a percent higher, which only strengthens the logical thinking. 

The EPFO ought to make this calculation and launch it frequently to successfully counter worries about the equity part’s risk.  If the markets fall sharply, the complete rupee gains might drop. However,  the annualized charge of return will definitely keep constructive and stay a lot greater than the mounted revenue element of the EPFO’s earnings. Receiving this data frequently would be an excellent consolation for EPFO members. The logical conclusion that one can draw from that is that the equity publicity in EPF ought to be greater. Not simply that, the EPFO ought to restructure its influx in order that the complete equity publicity (not simply the recent influx) reaches a better stage faster.

The knowledge exhibits to us that the actual threat lies not in the equity but in the mounted revenue. The mounted revenue element is bare—if in any respect—maintaining with inflation. Under mounted revenue, your retirement financial savings’ actual (inflation-adjusted) progress is principally zero. That opens retirees to the actual threat, the scary specter of outdated age sustenance. EPF investments have been made for many years. Over such lengthy intervals, the risk-reward trade-off for equities is vastly constructive, and that for mounted revenue is vastly adverse.

A number of days in the past, the EPFO board didn’t talk about a proposal to boost the equity restriction from 15% to twenty% as a result of the workers’ representatives opposing it. If one goes by the exhausting knowledge, growing the equity portion would be the most pro-employee move possible. The sooner Indian savers—and people managing their retirement financial savings— perceive and recognize this, the higher it’s for everybody. We’ve been speaking about equity in EPF since not less than 2002. That’s nearly two-thirds of the working lifetime of most salaried individuals. Someone who began working in 2002 at 22 is now 42 years outdated. An enormous alternative for producing actual wealth has been frittered away for such an individual. 

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