EPFO is going to invest in Equities

I read a news item in The Hindu that EPFO (Employee Provident Fund Organisation) is going to invest (Rs 5000 crores)  in Indian Equities through SBI Mutual Fund. This is a welcome move as even the foreign provident Funds invest in Indian equities. I am giving you the pros and cons of the proposed investment.

PROS AND CONS OF INVESTMENT INTO EQUITIES

Argument against investing in Equities

Firstly if you look at stock market all over the world (in the last 5 years) the returns have been poor is markets like US, European Union and Japan. The only saving grace had been China(even which has fell in recent months) and some emerging markets. Even these markets have not been giving pre 2008 returns. Most of the emerging markets are interlinked with US and European stock markets. Hence if you look at recent history it paints a dull picture.

Secondly as far as the pension fund is concerned most of the people involved are over 60 years in age. Their main source( for many the only source) of earning is pension. Hence they are not keen to take the risks of the stock market. If you look at the stock market of advanced countries in the last 5 to 7 years the returns are better in Gold when compared to Equities.

Thirdly when you invest in equities and that too through the government there will be pressure to invest in companies favoured by politicians. Hence there is greater risk of lower returns. What I am driving home is the point that the investment decision will not be taken by the Fund manager (who assesses the risk) but by politicians.

Finally the Lehman crisis has given a big blow to the capitalistic world which has wounded the faith public had on  stock market. There are highly specialized instruments(which are not understood by the public) which make investment in stocks a very risky proposition.

Arguments for investing in Equities

Firstly after opening of the Indian economy, foreign funds have invested in our stock market and have benefitted. This includes foreign pension funds too. If foreign pension funds have benefitted by investing in Indian equity why not Indian EPFO.

Secondly investing blindly in stock is dangerous but investing by a knowledgeable fund manager is not that risky. However we should make the fund manager(s) independent and  accountable for the investments so that he is not pulled up by the politicians to fund their cronies.

While it is accepted Gold has given good returns in the past 5 years. It should be taken into account that it (Gold) is not a sound investment as it goes up in value only during uncertain times. If you look at the world today things are stabilizing (US to a large extent and Eurozone is slowly limping back to normalcy). This means gold is unlikely to be a safe haven to park your investments in.

Finally only 5000 crores is being invested in Equities and hence exposure would not be great for the pension fund.

I would like to conclude by saying an Independent and accountable Fund manager(s) for investment into Stocks would be a welcome move as it would give greater returns to the Indian pension fund.