EPFO – The new savior for Govt. divestments

“EPFO to invest 5% of its corpus in stock market” made headlines during this week. 

(Link: http://www.livemint.com/Politics/Zt14mjK3CJKcTDDR5PO5AL/EPFO-to-invest-5-of-its-corpus-in-stock-market.html).

Image Source: Financial Express

Why Now?

Around Rs.8,000 crores funds from Employee Provident Fund (EPF) will find way into Exchange Traded Funds (ETF) of Public Sector companies in which Govt. wants to divest. During the last fiscal year, Govt. could not meet its divestment target. So it had to find new players to help them  with their divestment plans. Finance ministry did not have to try hard to find the elephant in the room. Now EPFO will become another savior along with LIC, UTI getting into market when there are no sufficient takers for the Govt. stake in PSU’s when Govt. wants to sell.

Will it affect EPF subscribers significantly?

EPF is a pensioner’s fund. To keep its risks lower, it had never put money into equity market so far. Now, 5% of the corpus will hit stock market. EPF subscribers need not worry much, as 5% exposure to equity market does not alter risk profile significantly and moreover the PSU’s like ONGC (to which major chunk of money would go now) have given decent returns. LIC (which also has a larger cash pool like EPF) is one of the market makers and had made good money over the last decade in the stock market. Another positive factor is reducing Govt. ownership and increasing retail participation through EPF might make those PSU organizations more responsible in their operations and finances.

Times Ahead

But Govt. would not stop with 5% (this is just initial step) and will increase it to 10% or even higher levels in the coming years. That will bring liquidity to stock market but at the risk of employees contributing towards their retirement. Risk has its rewards too. If PSU become more efficient and offer better returns for their shareholders, EPF subscribers will also see their savings growing at a better rate. Else, this would become another form of tax on them.