But considering the fact that the government with its pro-business bent and the Finance Ministry in particular plumping for drawing out the pot of pension funds that pan out insubstantial returns at a time when the interest cost to the life-time savers is showing hardly any sign of shrinkage, the sanctity of the pension funds no longer holds water! More than the market regulator or the Ministry of Finance, it is the retail investors who must be convinced that the fly-by-night operators are driven out and that companies seeking public deposits do not hoodwink gullible investors by promising high dividend but decamping with principal before long.

Though the jury is still not yet out on this reassurance as it is still early days for equity culture to take robust roots in the psyche of people, the Government is convinced that it is time that a sustained move is built on its part to pep up the bourses as a vehicle for corporate investment funding.

Be that as it may, the Employees Provident Fund Organization (EPFO) has begun investing in the stock market through the Exchange-traded fund (ETF) route on August 4. An ETF is a basket of securities that monitors the stock prices of the companies on an underlying index and is traded on the exchanges. As it is a passive fund, it has a much lower expense ratio and also forestalling the fund manager risk. It needs to be noted that the primary objective of any retirement fund is to generate inflation-beating returns. With inflation based on consumer price index coming down from its double-digit zone to a single digit in recent months and wholesale price index-based inflation treading on negative zones for quite some months, the provident fund managers can now breathe easy as their capacity to deliver over inflation is not going to tax their investment-diversification acumen even as they were operating in a restricting milieu with hands heavily tied down!

The government notified a new investment pattern on April 23, 2015 for investments by EPFO which prescribed minimum 5 per cent and up to 15 per cent investments in equity and related investment under which ETF instrument falls. At the launch event in Mumbai to mark the EPFO’s maiden foray into equities, the Central Provident Fund Commissioner, Mr. K.K. Jalan said that “we have decided to take it slow and see how it goes. So, we will start with an investment of up to 5 per cent of the incremental corpus in ETFs with the Organization allocating Rs 5000 crore by March 2016”.

For now, the EPFO will invest in two schemes of SBI Mutual Fund—SBI-ETF Nifty and SBI-Sensex ETF with 75 per cent in the former and the remainder in the latter in equity asset class. Even as the equity investments would be managed passively with no fund manager, the ETF does come with an expense ratio that would be borne by the investor. But Mr. Jalan was on record that SBI Mutual Fund has given “us a discount on the expense ratio as we will pay only 0.07 per cent and the expense ratio will be deducted from the fund value”. This has also set off a positive trend to the EPFO with Reliance and ICICI Pru mutual funds having pruned their expense ratios from 0.5 per cent to 0.03 per cent on their Sensex and Nifty ETFs in the hope to garner a higher share of the EPF money. For the retail investors, this is bound to gladden them as it would reduce tracking error of the funds.

Here a caveat is in order. There are perspicuously basic differences between market-linked products like stocks and non-market-linked products like bonds held till maturity. While market-linked products such as gold and stocks provide no guarantee of returns as their gyrations are quite common and on a daily basis, the non-market linked ones give staid returns over the long haul.

With conservative savers reluctant to stomach the volatility in market movement of shares/gold and staying away judiciously from subscribing to these products in the exchanges, experience has shown that the difference between long-term returns from market indices like Sensex and safe fixed-income products like bank deposits is at least three to four per cent. Hence, a monthly investment in ETF for the really long-term makes salutary sense. In a presentation on investing in financial markets, the National Stock Exchange (NSE) said a comparative scrutiny of returns in equity and debt revealed that equity markets have higher returns in 11 out of 16 calendar years, even as the negative returns in four years were recouped in immediate subsequent years.

The Minister of State for Labour and Employment Bandaru Dattatreya has justified EPFO’s decision to make a modest start into investing in equity through the ETF route. He maintained that “if we remain invested in fixed income alone, then the interest rate is likely to remain subdued and see further downward trend in coming years. If we had not changed our investment portfolio, then it would be difficult to give good rate of returns to subscribers. So it was considered appropriate to bring change in the methods of management of funds cautiously and carefully”. Considering the past track record of the EPFO when its investments were subject to obsolete and ossified guidelines that bear no relevance to realities in the market place, this refreshing move and candid appraisal of an SWOT analysis by the Minister will definitely help the Organization to make its modest move to reap better returns out of its huge investment chest for efficacious end-result to its lakhs of subscribers after superannuation.

Interestingly, gone is also the whiff of grunts from the so-called politically left-centric parties that could not brook even any talk of investing in equities of the hard-earned income of the harried working class if the same were aired two decades ago when India had its tryst with economic liberalization in the early 1990s. With the silver-jubilee of economic reforms behind and market forces determining efficient allocation of resources even as the State is focusing on development issues and reining in consumption expenditure exemplified in escalating interest cost, subsidies and defense expenditure, the time is apposite for making small alterations that lend a new light on the big picture over the medium to long haul to benefit the youthful population. Considering the fact that the EPFO has chosen a cautious path through ETF with a meager expense ratio on its exposure to the equities markets, any gainful outcome would goad the organization into scaling up its equities exposure by degrees to 15 per cent over the long haul, Mr. Jalan optimistically observes. (IPA Service)