The share market regulator Securities & Exchange Board of India (SEBI) plans to propose that rules are tweaked to allow EPFO, which comes under the ambit of the labour ministry, to invest up to 15% of its corpus in select equity schemes.
EPFO can invest up to 15% of its corpus in shares of companies in which derivatives are allowed. But because of riskaversion on the part of its trustees, investments in equity mutual fund schemes are not allowed. This is a barrier that the regulator and the finance ministry will have to overcome as there has been resistance from the labour ministry and EPFO to attempts to channel retirement funds to equity markets. EPFO contributions come with tax advantages as well as assured returns.
According to EPFO’s annual report for 2011-12, the total corpus available with it is about Rs. 5.46 lakh crore and the annual incremental inflow is about Rs. 80,000 crore. SEBI is of the view that the government could encourage companies and individuals to participate in pension schemes outside EPFO by channeling that money to the mutual funds sector.
Since the provident fund corpus comprises contributions from both the employee and employer, workers should be given an option to invest a part of their share in a mutual fund product. Under the EPFO Act, workers earning up to Rs. 6,500 per month are required to be members while those drawing more than this threshold can choose to stay out.
“It will be one of the biggest moves to encourage longterm domestic savings into equity markets, which we badly need,” said Dhirendra Kumar, CEO of Delhi-based mutual fund tracker Value Research. “Today, retail investors don’t have a choice of investing their long-term savings into equities with tax benefits like that of NPS (National Pension Scheme), EPFO or PPF (Public Provident Fund), which are dominantly fixed-income retirement saving options.”
The Securities & Exchange Board of India and the government are working on sweeping changes to the policy on mutual funds that could see them gain access to a substantial amount of money from the state-administered provident fund and other retirement programmes, a move that could lift the fortunes of the asset management industry.
Over 50 % of household savings are currently parked in bank deposits as investors prefer products that protect their principal and ensure assured returns.
The capital market regulator is in talks with the finance ministry to allow mutual funds to manage long-term funds such as retirement savings as it proposes to introduce mutual fund-linked retirement plans in line with similar schemes overseas, such as the US 401(k). Since policy is the domain of the government, the finance ministry is also involved in the process and is part of a committee working on the draft.
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