Safety is, as it should be, the first criterion while saving for one's retirement kitty.
However, safety for too long can be damaging, in terms of returns. The consumer price index (CPI) has been about 10% during the past year while the return from the employee provident fund scheme was 8.5%.
In such circumstances, the decision of the Central Board of Trustees of the Employees Provident Fund Organisation (EPFO) to allow investment in private sector bonds, if they meet certain conditions, is welcome.
This decision, coupled with the Pension Fund Regulatory Development Authority (PFRDA) allowance for the National Pension System (NPS) managers to invest in any stock listed in the derivatives segment & the government's decision to allow insurance companies to invest in AA rated papers would mean that returns for the retirement schemes would improve. It also means more volatility in returns.
Mr. Dhirendra Kumar, Chief Executive, Value Research Online said, '' But volatile need not necessarily mean riskier. The retirement funds have a potential to generate higher returns over a 10 to 15 year time frame, though they might be volatile on a day-to-day basis. Anyway, with higher inflation & low returns from EPF, our capital is going down in a guaranteed manner".
According to experts, the move is expected to add between 0.5 % and 0.75% to the annual growth rate of EPF. The annual budget for 2012 - 13 also permitted pension funds & provident funds to invest in exchange traded funds (ETFs), debt mutual funds and asset-backed securities.
According to a pension fund manager, a risky decision is highly unlikely because the guiding principle set by PFRDA is safety of the principal amount & optimum returns. "So, I have no freedom but to replicate the Nifty or / Sensex, though technically I can invest in any liquid security, which means it has to be present in Futures and Options,'' he says.
Of course, the next step for EPFO could be investment in equities, to improve their returns. As the pension fund manager says, "All the NPS funds have been giving an average of 10% returns, while the EPFO has been struggling to give a return of 8.5%."
Mr. Nishant Agarwal, Senior Director, ASK Wealth Advisors, said,'' The move is a step in the right direction. A retirement fund needs a time frame in its favour to reap the benefit & generate returns. For this, you need a growth asset class, like equity. But you need to contain the risk by investing in different sectors & diversifying between fund managers. Even globally, retirement funds invest in real estate, equity & gold because those assets give real returns''.
Src: BS
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