Ignore this and put your retirement money at risk... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Ignore this and put your retirement money at risk... 

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In this issue:
» India ranks lowest in the global pension income index
» The relationship between gold and black money
» Has NDA been successful in reversing policy paralysis?
» Global markets test their worst ever lows..
» ...and more!

The Employee Provident Fund Organization (EPFO) handles retirement corpus of employees. Hence, it comes with a conservative mindset. Until now, preferred investment avenues included government securities and bonds. However, it is a fact that fixed income instruments are unable to offer inflation adjusted returns in the long term. Hence, the Finance Ministry (FM) allowed EPFO to invest a portion of the corpus in equities.

Paying heed to FM's proposals, EPFO finally made up its mind to invest some corpus in equities during the last month itself. And during one recent informal meeting where the trustees were laying groundwork for equity investments, many were of the view that the money should be invested only in profit making Navratna PSU enterprises.

While the thought of diversification to equities made immense sense, we reckon the proposal to limit the exposure to PSU stocks is flawed. In short, nepotism towards PSU stocks is unwarranted. Why subject oneself to just PSUs and not the entire stock universe?

Perhaps, the trustees find safety in PSUs due to government ownership. However, this very idea is deceptive. For they will lose out on superb investing returns on well managed and more efficient private sector enterprises. Not to mention that several PSUs, though profitable, have poor governance. The NPA plagued PSU banks are the prime example of badly managed PSUs. Also, remember that for PSUs profitability is not the sole objective. They have various social obligations to fulfill. Subsidies that oil marketing companies have to bear or for that matter inability of Coal India to freely price its produce are few examples in case. In fact, many PSU stocks trade at a discount to their private counterparts for this very reason.

Also, when the basic premise behind investing in equities is to look for good long term returns, limiting oneself to PSU stocks is not a good idea. To put things in perspective, our back of the envelope calculations reveal that the BSE PSU Index has compounded at 8% per annum over the last 10 years. And this is lower than the 8.75% interest rate which EPFO has proposed for the current fiscal! In fact, over the last 10 years the EPFO interest rate has never been below 8.25%.

So, basically by investing only in PSUs, the EPFO is looking to generate a higher return from an asset class which in reality has been an underperformer compared to EPFO's current asset classes! This is foolhardy especially because the management of PSUs may remain constrained by the government's interference.

Since 1952, the peak EPFO interest rate has been 12%. Hence, if the EPFO really wants to increase the overall return of its corpus, non-PSU equities cannot be ignored. Even an index fund/ETF is a better option than just plain vanilla PSU equity. The idea should be to invest in best and well managed companies and not create barriers.

Do you believe the EPFO should invest your retirement corpus just in PSU stocks? Let us know your comments or share your views in the Equitymaster Club.

Pension systems in India have yet to catch up in the way it has in the West. Indeed, as per the global pension income index, India's ranking remained unchanged at D. However, it's not all bad. The grade implies that India has a score between 35 and 50. The silver lining is that India's pension system does have some sound features. But at the same time there are also major omissions and weaknesses. Whether India scores well is on the integrity of the social security systems. This means that there is growing confidence in the pension system and the regulations are strong as well to protect employee benefits. Where India scores low is the adequacy of the system. This means that there is not much confidence that there is enough in the government coffers to dole out a healthy pension.

Globally, pension systems particularly in the West have come in the limelight. Concerns have been raised whether the system will fail given that governments have piled on so much debt on their books. India's finances are not particularly in great shape either. And the focus would be more towards developing infrastructure in the country. Hence, we would not be surprised if the country continues to be ranked low at least as far as the adequacy factor is concerned.

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02:55  Chart of the day
When the NDA government came to power, industry was really excited. Expectations were high of speedy project clearances and reduced red-tape. The government certainly started off on a positive note. The project management group was given the task of reversing policy paralysis. Nearly 5 months after taking charge, the government can claim credit for clearing 178 projects with a value of US$ 105 bn! However, things on the ground are not so rosy. Many of these projects are still stuck. Various reasons like debt financing, court cases, labour problems and even issues with state governments have all proved to be serious challenges. What's more, 286 projects have still not received approval. Sectors such as power, roads, oil & gas and steel are bearing the brunt of the delays. The fall in the IIP over the last two months has reflected this. We will not be surprised if industrial activity remains subdued in the short term. However, if the government were to get more proactive in this regard, the long term prospects for these crucial sectors will improve significantly.

Has PMG's performance been satisfactory so far?
*PMG= Project Management Group

Arvind Subramanian's appointment as India's chief economic advisor does not come as a surprise. For after RBI governor Dr Raghuram Rajan, this is yet another instance of an acclaimed academician wearing the hat of a top government official. However, most readers would not know that Subramanian has a chequered history on his research about India' black money problem . The fact is that India's gold import is once again shooting up! This truth is lost in the euphoria of softening oil price and falling inflation.

However, what is ignored is that most of the gold that is imported by Indian traders and bullion houses is from Switzerland. Now, does that ring a bell? Well, Mr Subramanian had earlier pointed out the wide discrepancy in the data on India's gold import from Switzerland and Switzerland's data on the quantum of yellow metal exported to India. This had stoked the suspicion that many wealthy Indians could be over-invoicing imports from Switzerland. Simply put, if they were paying US$ 100 for gold imports, they were actually importing gold worth US$ 5, with the balance US$ 95 finding its way into Swiss bank accounts. Now, as per economic times gold imports have risen 400% YoY to 95 tonnes in September 2014. The benign explanation here is customary festival demand and a dip in global prices. Jewellers claim that the rise is due to a change of gold import rules. However it is high time that the new economic advisor tries to find the truth thus bringing his black money research to some logical conclusion.

Global markets tested the bottom for the week gone by witnessing the worst ever lows on account of concern over the global economy, conflicting views on the timing of the next policy move by the Federal Reserve, and headlines about the Ebola virus. This triggered tumult in financial markets and a bout of volatility not seen in years. Moreover, a growing sense of structural change in the oil market, as the unyielding rise in U.S. shale oil production is expected to threaten the tepid oil demand growth for years to come. The quick and sharp downward oil price cuts reflect a growing realization of a sea change in the global market. U.S. stocks continued to face choppy session the entire week gone by but managed to stay above multi-month lows towards the week end, and the benchmark index closed down by 1.8% during the week.

Deflation has already hit five peripheral euro zone countries in September, including Italy and Spain, while a string of surprisingly weak German data showed the euro zone's power house is losing momentum. Underlying worries about slowing world economic growth kept investors on edge, hence Asian indices too faced turbulent week with Japan witnessing the steep fall (down 5%) on account of floundering economy. Back home, the Indian equity markets witnessed a major correction for the week gone by putting the investors on cautious mode. While few major IT companies have kick-started the earnings season, the weak global cues continued to dent the domestic stock momentum.

A sign of worsening growth in euro zone, Ebola's spread and rise of unrest in the Middle East is expected to hurt sentiments across global markets for the coming week. Back home, higher volatility is expected next week as financial markets will be on alert following two key state election results on Sunday, company earnings and global events. Barring short term hiccups from weak global cues, the long term fundamentals of the economy remain strong and investors should focus on investing in financially strong stocks.

Performance during the week ended Oct 17th, 2014
Data Source: Yahoo Finance, Kitco

04:50  Weekend's investing mantra
"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." - Warren Buffett
Today being a Saturday, there is no Premium edition being published. But you can always read our most recent issue here...
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15 Responses to "Ignore this and put your retirement money at risk..."


Oct 21, 2014

A proposal should be made to invest the required amount to fetch undisturbed returns to meet the curent pension payments and the currect expenses . The amount of new members below age of 45 are
to be invested in equity for heigh returns. and remeailing amount may be invested in low risk instruments.
before drawing a plan the contribution of members to be segragated with their present ages. Then tha amounts should be invetsed in diversified mannar. !!!!!!!!!!!


ramchandra varma

Oct 19, 2014

EPFO,should invest total equity ie psu and other public sector well managed companies.So that EPFO can deliver better returns to the EPFO members.


Sunil Mangalvedhekar

Oct 19, 2014

EPFO should not invest just in equities but consider entire stock universe.



Oct 19, 2014

epf funds should not be invested in stock market


Y V S S Babu

Oct 19, 2014

Not at all !. Such limitations will only defeat the very purpose of the scheme. I believe that when any such progressive proposals are implemented, only the well knowledgeable persona should be on board to air proposals so that those are made with sense and proper logic, not to allow lot of time being wasted in dialogue and debate before the proposal is implemented to yield the desired results.



Oct 19, 2014

Investing the portion of PF corpus money in equity market is for generating higher return to pay back higher interest to the account holders. But investing only in PSU Stocks in not going to serve the purpose and not only that there is a chance of loosing or eroding the value of the capital also is inevitable. So Wise Brains think twice before handling the common men's hard earned money for better returns before taking any investment decisions.


sunil.v devan

Oct 19, 2014



Govindarajan B

Oct 18, 2014

Of-course the EPF Organisation can invest in Equities provided they have proper Fund Managers to watch and do proper transactions.



Oct 18, 2014

No. It should be invested in private sector also in accordance to the business cycles. Otherwise all these investments will result in loss

This is not government's money. This is hard earned money of employees.


Rajendra Kumar Singhai

Oct 18, 2014

NO. Not at all. The funds should be invested in diversified porfolios.

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