Debate on whether to invest in Employees’ Provident Fund (EPF) equity has effectively ended. A few days ago, data about EPFO Investments introduced in Parliament. The headlines said the total investment in equities of Rs 1.59 lakh crore increased to Rs 2.27 lakh crore, making a profit of Rs 67,619 crore. That sounds great, but it doesn’t tell you much about the true rate of return generated from these investments that we need to know. Remember, the debate is about whether additional Return Equities are worth the extra risk. To conclude, one needs to have an annual rate of return for both the parts. Knowing Rate of Return for Fixed revenue The division is easy—it’s likely to be between 6.5 and 7.5%. Equity returns are difficult because detailed inputs are not in publicly released data.

To find out, I made some reasonable assumptions and calculated the ballpark return for the equity portion. Here’s what I did. From the information released, we know the total investment for the four periods. Rs 39,662 crore for 2015-2019, Rs 31,501 crore for 2019-20, Rs 32,070 crore for 2020-21, Rs 43,568 crore for 2021-22 and Rs 12,199 crore for the first three months of 2022-23. For each of these periods, let’s say the investment was split into equal monthly installments, SIP style. For the subsequent four periods, this is probably quite accurate. However, for 2015-19, the monthly investment potential was not equal but increasing.

This means that my assumptions will reduce the expected return, but for the time being let’s go with it. Given these assumptions, I created a spreadsheet where the XIRR function tells me that the annual rate of return was 13.6%. Not bad, especially as a counterweight fixed income Anemic returns of the part. As I mentioned above, the actual returns are likely to be somewhat higher. A slightly different approach that allows increasing monthly investments in 2015-19 (which of course happened) results in a return of about one percent higher, which only reinforces the argument I’m making.

The EPFO ​​should calculate this and issue it regularly to effectively counter the concerns about the equity stake exposure. Releasing the total profit doesn’t do that. If there is a sharp decline in the market, then the overall gain of the rupee may decline. However, from now on the annual rate of return will definitely be positive and will be much higher than the fixed income component of EPFO ​​earnings. Getting this information regularly will be a great convenience for the EPFO ​​members. From this one can logically conclude that equity exposure in EPF should be high. Not only this, the EPFO ​​should restructure its inflows so that the total equity exposure (not just fresh inflows) rises to higher levels.

The data shows us that the real risk lies not in equities but in fixed income. The fixed income component is barely-if at all-in line with inflation. Under fixed income, the actual (inflation-adjusted) growth of your retirement savings is basically zero. It opens retirees to real risk, the horrifying specter of old age poverty. EPF investment is being done for decades. Over such a long period, the risk-reward trade-off is extremely positive for equities, and extremely negative for fixed income.

A few days back, the EPFO ​​board did not discuss the proposal to increase the equity limit from 15% to 20% as employees’ representatives opposed it. If one goes to the hard data, increasing the equity share would be the most pro-employee move. The sooner Indian savers – and those managing their retirement savings – understand and appreciate this, the better it is for everyone. We are talking about equity in EPF since at least 2002. It accounts for about two-thirds of the working life of most salaried people. Someone who started working in 2002 at the age of 22 is now 42 years old. A huge opportunity for such a person to generate real money is gone. Let’s not raise this error in future.

(The writer is CEO, Value Research.)