Should your pension plan contain equity?

A newspaper knows how to get your attention! The economic times carried an article yesterday titled, “EPFO may have ruined your retirement plans. Here’s how”. For its standards, the article makes the sensible conclusion that young people should invest enough in equity.

The subject of the article is the following:

EPFO will now invest 5% in equity. Had it invested more (a lot more) and lot earlier, retirees would have ended up with a larger corpus. So the  group referenced in the title are those who have retired or those close to retiring.

The national pension scheme (NPS) allows individuals and corporate employees to invest up to 50% in equity and mandatorily(!) invests 15% in equity for govt. employees.

A small percentage allocation (5% or even 15%)  will not make a big impact on the corpus, as shown by the economic times article.

Should a pension fund or retirement plan (mf based) contain significant amounts of equity?  My answer would be no.  The investor should invest in equity separately independent of such products.

Here is why I think so:

1. Pension products are typically inflexible in which an employee stays invested for many years. If the pension product has equity exposure, it is not a smart idea to let the same management handle it for many years, if not decades. Would you assume that the mutual fund or stock you invest in will perform well and not change it at all, no matter what?

2. Pension products can be taxed in a different way. Take NPS for instance. The 50% equity exposure means very little because, the gains as well the amount invested will be taxed per slab upon redemption. Had you chosen to invest in equity separately, there is no tax on the amount invested and the long-term gains are tax-free. Yes, this is as per current law which can change anytime. Will in you invest in NPS (esp. to get the additional 50,000 deduction) in the hope that tax laws will change!!  Read why you should not waste that 50,000 in NPS

Yes, something like the reliance retirement fund can help here, but why marry into the same fund until retirement? The amc wants you to do just that! Read more about the fund here

Why mess up a pension product with equity in it? Let it remain a pure debt product so that it serves as a benchmark for you to seek risk-premium elsewhere independently without shackles.

Let us treat the mandatory pension product as just one component in our retirement portfolio and not the only component.

EPFO did not ruin anyone’s retirement plans. The retirees did it themselves by not recognising the risk of inflation.

Reference: The ET article:

http://economictimes.indiatimes.com/epfo-may-have-ruined-your-retirement-plans-heres-how/articleshowsp/47654703.cms

######

Register for Hyderabad Investor Workshop – June28th, 2015

Want to conduct a sales-free "basics of money management" session in your office?
I conduct free seminars to employees or societies. Only the very basics and getting-started steps are discussed (no scary math):For example: How to define financial goals, how to save tax with a clear goal in mind; How to use a credit card for maximum benefit; When to buy a house; How to start investing; where to invest; how to invest for and after retirement etc. depending on the audience. If you are interested, you can contact me: freefincal [at] Gmail [dot] com. I can do the talk via conferencing software, so there is no cost for your company. If you want me to travel, you need to cover my airfare (I live in Chennai)

Connect with us on social media


Do check out my books


You Can Be Rich Too with Goal-Based InvestingYou can be rich too with goal based investing

My first book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create customg solutions for your lifestye!Get it now.  It is also available in Kindle format.

Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want

Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you want My second book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a youngearner

The ultimate guide to travel by Pranav Surya

Travel-Training-Kit-Cover This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step.  Get the pdf for ₹199 (instant download)

Create a "from start to finish" financial plan with this free robo advisory software template


Free Apps for your Android Phone

All calculators from our book, “You can be Rich Too” are now available on Google Play!
Install Financial Freedom App! (Google Play Store)
Install Freefincal Retirement Planner App! (Google Play Store)
Find out if you have enough to say "FU" to your employer (Google Play Store)

About Freefincal

Freefincal has open-source, comprehensive Excel spreadsheets, tools, analysis and unbiased, conflict of interest-free commentary on different aspects of personal finance and investing. If you find the content useful, please consider supporting us by (1) sharing our articles and (2) disabling ad-blockers for our site if you are using one. We do not accept sponsored posts, links or guest posts request from content writers and agencies.

Blog Comment Policy

Your thoughts are vital to the health of this blog and are the driving force behind the analysis and calculators that you see here. We welcome criticism and differing opinions. I will do my very best to respond to all comments asap. Please do not include hyperlinks or email ids in the comment body. Such comments will be moderated and I reserve the right to delete the entire comment or remove the links before approving them.

4 thoughts on “Should your pension plan contain equity?

  1. Why mess up a pension product with equity in it? Let it remain a pure debt product so that it serves as a benchmark for you to seek risk-premium elsewhere independently without shackles.///
    agree totally .. with not many incentives , this corpus will be given to LIC and ultimately they will screw you up. its better if epf invests only in debts. if still they want to improve the yields , let them invest in AAA rated commercial papers but not to equity. individuals can take exposure .

  2. Why mess up a pension product with equity in it? Let it remain a pure debt product so that it serves as a benchmark for you to seek risk-premium elsewhere independently without shackles.///
    agree totally .. with not many incentives , this corpus will be given to LIC and ultimately they will screw you up. its better if epf invests only in debts. if still they want to improve the yields , let them invest in AAA rated commercial papers but not to equity. individuals can take exposure .

Comments are closed.