The rate of return from the social security fund of the Employees’ Provident Fund Organisation has nosedived to 8.1 per cent, the lowest since an eight per cent return in 1977-78. This may come as a disappointment to over 60 million salaried employees who, along with their employers, contribute monthly towards funding their retirement. Even so, it is only a reflection of the state of the global economy in which such returns from investments in bonds and partially in the equities markets through ETFs are to be considered as not abnormal.
With a Rs 16 lakh crore corpus from over 24 crore accounts to look after, the trust has an onerous responsibility and cannot be too adventurous in its investment policies, particularly in the current market environment that has been subjected to a pandemic for two years and then the war in Ukraine that has roiled the international oil market. The safety of the fund is far too important as the history of pension funds invested in equity markets abroad with some disastrous consequences has shown. Going forward, the fund can expect to do better as equity markets improve after emerging from recent shocks.
Debt market investments, while ideally steady, cannot offer much more than bank interest rates, which are, however, likely to rise marginally once RBI’s growth-oriented accommodative stance changes to deal with inflation. It is moot whether provident funds will remain the ideal savings instrument for retirement when several other equity-market based avenues are more freely available from India’s insurance and finance market investment players these days. But that is not a call the government can take on behalf of millions.
The timing is tricky currently because foreign outflows have been strong from the Indian equity market. However, there is no denying that the equity markets in the long run give better returns than bank deposits and the pension fund can continue to do its best in a combination investment of government securities, bonds and ETFs. It would be up to salaried employees to look for savings beyond just their statutory contribution and start investing wisely in long term instruments to buttress their retirement fund.
