Recently, the government moved to address this issue. A long standing proposal to allow funds managed by the Employee Provident Fund Organisation (EPFO) was taken up by the labour and finance ministries. It was decided to allow the EPFO to invest up to 5% of its corpus into equities. The EPFO manages about US$ 100 bn of pension money and is among the largest pension managers in the world.
It began investing in Indian equity markets, for the first time ever, from 06 August 2015. The first investments were made in two exchange traded funds (ETFs) of SBI Mutual Fund. As was reported in the Business Standard, the EPFO's equity investment would amount to about Rs 4.1 bn monthly and about Rs 50 bn yearly.This was to be scaled up later.
Now these numbers may change dramatically. The Minister of State for Finance Jayant Sinha has asked the EPFO to increase its investment from 5% to 15% of its corpus. Additionally, smaller pension fund managers for state government employees have asked for a 50% limit on equity investments. If both proposals are approved, it would lead to a flood of pension money into the Indian markets. The EPFO could very well overtake LIC as the largest domestic institutional investor (DII).
This is good news for long term investors in Indian stocks. The funds will help curb volatility to an extent. However, this move comes with a fair share of risks attached to it. Investors should note that most of these funds would enter the markets via the ETF route. Thus, the funds would be concentrated in the Nifty stocks. We believe, long term investors would be better off practicing bottom-up investing in fundamentally sound stocks, across market caps, rather that sticking with stocks in the benchmark indices alone.