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:
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