Should I withdraw from EPF and invest in equity now?

The Employees Provident Fund scheme was amended on March 28th 2020 to include a non-refundable advance (tax-free) advance in view of the lockdown across the country. With the stock market in the middle of a crash, can this advance be used to invest in equity now? Who can do so and who should not. A discussion.

The EPFO has released an excellent FAQ on the subject. The advance is tax-free and can be obtained without any documentation. Follow these steps to find out how much can be taken out.

One: Compute (monthly basic + DA) x 3. Two: Compute 75% of EPF account balance. Three:  Your eligible balance is the lower of the two numbers.

Should I withdraw from EPF and invest in equity now? The answer is not a simple yes or no. It depends on your motive, your asset allocation and age.

Many would find the very thought of withdrawing from EPF to invest in equity as a sin! The idea of interrupting guaranteed true, tax-free compounding in favour of stock market uncertainty is unacceptable to many. If you are one of them, then the rest of the article will not be of much use to you.  I am expecting strong disagreement in the comments!

If you wish to withdraw from EPF only because the “stock market is down”  and you wish to profit when it moves up, then I would recommend that you do not. Your EPF deserves much better respect than such short-term thinking.

If you are above 50 years of age, then regardless of your asset allocation, do not shift money from EPF to equity.

If your retirement is several years away and if you are capable of judging your investment at the portfolio level, that is, you have a target asset allocation, track changes in asset allocation and understand the importance of portfolio rebalacing, then yes, you can take advantage of this EPF advance and increase your equity exposure. The EPF advance may or may not help you achieve your target equity allocation, but for what it is worth this is a good opportunity to add some funds into equity.

If your retirement is several years away and if you have a debt-heavy portfolio and you are capable appreciating asset allocation and can take decisions without regret this is an opportunity for you to increase equity levels.

What the risks? The EPFO is already flooded with advance applications. So it could take days and days for the advance to hit your account! The market could recover by then leaving you filled with regret!

It would still be good to increase equity exposure if your asset allocation has room for it, but are you capable of looking at it that way? Regret has no place in portfolio management.

The market could fall further after you add the EPF advance. Can you handle that? Your spouse or parents might criticise you. Can you look at your plan then and reassure yourself that you have done the right thing?

Is it morally correct to do this? It is your money and the govt is allowed a no-questions-asked withdrawal for those affected by the lockdown. Is your equity portfolio not affected by the lockdown? Would it not be affected in future?

As long as you have a plan, as long as you know what you are doing and most importantly can live with your decisions, shifting money from EPF to equity is not a terrible idea. The question is, do you have a plan in place?