Good long-term strategy: EPFO's stock market move shows govt's confidence in economic revival

After several years of dilly-dallying, the Employment Provident Fund Organisation (EPFO) has finally put faith in the domestic stock market by pledging to invest Rs 5,000 crore to start with in the current financial year (2015-16).

The move has been hailed by experts across the equity market fraternity. Market experts reckon the decision to infuse provident fund money into the equities has come at the right time when the country is already witnessing a pick-up in economic activity.

This would certainly provide a major impetus to the stock market with several brokerages, including domestic and foreign, expecting the Sensex to top the 30,000-mark by December end.

“India’s long-term growth story is very much intact, and steady flow of EPFO funds into the markets will further boost the sentiment. This shows the government’s growing confidence in the equity markets as a good long-term investment avenue, which would provide higher returns going ahead,” said Alex Mathew, head research, Geojit BNP Paribas Financial Services.

Labour Minister Bandaru Dattatreya has said the return from the exchange traded fund (ETF) investment will be more than the 8.75 percent the EPFO offers to subscribers now.

If one looks at the stock market performance over the last 16 years, the benchmark Sensex on several occasions has delivered exponential returns in comparison to a rather static returns offered by the EPFO.

For instance, in 1999-2000, the Sensex posted returns of nearly 22 percent compared with the 12 percent interest rate on provident fund. Similarly, in 2003-04, the Sensex delivered a robust 74 percent returns against EPFO’s 9.50 percent.

Further, the Sensex shot up a whopping 65 percent in 2005-06, while in 2009-10 the index soared 72 percent on the back of robust foreign fund inflows. Post the formation of new government at the Centre in 2014, the Sensex continued its upward trajectory, registering gains of 16 percent in the last financial year. In all, the Sensex has delivered positive returns in 10 out of the last 16 years, showing the consistency in equity market performance.

“There could be highs and lows in the markets going ahead…so one cannot shy away from this. The EPFO money will offer lot of depth to the market, as the idea is to steadily reduce our dependence on the foreign inflows which have been driving our markets over the past two decades or so,” said Saurabh Mukherjea, CEO-Institutional Equities at Ambit Capital.

Pankaj Mathpal, a Mumbai-based Certified Financial Planner, says, “It’s a good move. Equity exposure as a long-term savings is a good move. As the returns by EPFO are guaranteed to its members, this will not directly impact the returns earned by the members. But, EPFO may earn higher returns via the equity exposure. The good thing is that EPFO has taken the ETF route, and have kept safety concern in mind as well. All in all it’s a welcome move.”

While the EPFO money into the stock market in the current financial year (2015-16) is pegged at 5 percent of the total corpus of Rs 6.50 lakh crore, the government has given its green signal to increase the investment limit to 15 percent from next year.

“While 75 percent of the incremental fund will be invested in the NSE ETF, the remaining will be made in the BSE ETF,” a PTI report said quoting Central PF Commissioner KK Jalan.

Although, the Sensex has gained a meagre 2.68 percent in the current year so far, foreign investors have infused funds to the tune of Rs 46,000 crore while domestic mutual funds have pumped in Rs 37,877 crore into the local equities so far, as per the information available on the Sebi website.

“There is further scope of appreciation in the markets going ahead, although the market has to encounter several domestic and external challenges. But with a long-term perspective, one can rest assured that India is the country to be in as growth potential is huge,” said a market analyst on condition of anonymity.

Data analysis by Kishor Kadam. Bindisha Sarang contributed to this story