EPFO insists on Guarantee

According to a news report in one of the pink dailies, labour ministry has requested the finance ministry to provide a guarantee for investing EPFO money (that too only up to 15% as proposed by Finance ministry) in stock market. As of date there has been no news of finance ministry acceding to the request of labour ministry.

Why this clamour for guarantee by EPFO trustees? This is, we feel, because the labour ministry and the EPFO are still living in an era when government used to guarantee returns and it feels the latter should continue to guarantee returns for equity investments also! Moreover, the insistence on guarantee by labour ministry can be explained by the fact that since the Board of Trustees and the babudom of labour ministry may not have any involvement/exposure in the stock markets and hence sees only one side of the coin. Hence, they are willing to forgo the chance of workers getting a higher return in lieu of saving their skin!

What they fail to comprehend is that in their zeal to appear as sole protector of worker’s money, they are eroding the value of accumulated savings systematically—by insisting on investment of corpus in fixed income investments.

Most equity investors—that we've interacted with—are willing to forgo guarantee owing to the following reasons:-

• History has shown that investors relying on debt alone and thereby shunning equity totally---eventually run into the risk of effectively becoming poorer and poorer as retirement draws nearer.
• It’s positively dangerous to rely on debt alone to preserve the value of their money—dawns on to the investor only when it’s too late.
• Equities pay in the long term and pays handsomely.

While equities tend to be volatile in the short term, it gives superb returns over the long term. Hence, we've always maintained that conservative investors would be better off by having a small percentage of their savings in equities. Even a 10-15% exposure to equities would generate return which at least equals inflation.

For service class, by having a small exposure to equities and ignoring the short term volatility can be beneficial in the form of accumulating a bigger retirement corpus. Equities offers a chance of looking at the other side of the coin also—a fact conveniently overlooked by EPFO trustees