EPFO to invest in equity markets – a laudable policy reform

Amidst the Greek Scare, most investors did not take notice of a landmark announcement by the Labor Minister last week - allowing Employees’ Provident Fund Organization (EPFO) to invest 5% of their incremental deposits into equity markets. The Central Government and the Minister deserve applause for pushing a long awaited and extremely important policy reform, amidst stringent opposition from politically significant labor unions. This proposal initiated by the Finance Ministry during the previous NDA regime has always been opposed by the Labor Ministry due to political reasons. The falling returns from Fixed Income Securities make it very important for the EPFO to diversify into equities to manage an overall return equal, if not better, than the guaranteed 8.75%. Over a period of time one can expect various privately managed provident funds to take a cue from this and start investing in equities to improve their overall returns.

Most relevant and momentous benefit is that this will automatically increase domestic retail participation in our equity markets, making them broad based and less vulnerable to Global Swings and Sentiments.