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Instead of subsidies, restructure portfolios for a higher EPF return

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Instead of subsidies, restructure portfolios for a higher EPF return

It is an annual tug-of-war — the process of fixing the rate of interest on the Employees Provident Fund (EPF) scheme. While the finance ministry would like to align this rate to the market, and point to the deficit if an artificially high rate is paid, labour unions would like a rate they believe is reasonable enough for the long-term funds of employees. The cold logic of what has been earned only can be paid out is usually lost on those who argue for a higher rate, as they expect the government to make good the deficit. There is no dispute about securing the long-term interests of EPF subscribers, but solutions lie in restructuring the portfolio to meet these goals, rather than in subsidies.

If those who argue for higher returns on long-term investments allow portfolios to be constructed, by using simple principles of diversification and strategic asset allocation, we would go a long way. In several developed markets, investment committees of pension portfolios are pulled up for failing in their fiduciary responsibilities if they dont diversify and seek asset classes that offer a higher return. They under- stand that these risks can be diversified, and that diversification creates an efficient combination of higher returns and lower risks for the portfolio. Investments in India by funds such as Calpers are based on this understanding of risk and return. It would be a good idea to use some of the money in the Investor Education and Protection Fund to bring first principles in finance to those who influence policy without caring for the implications.

More : expressmoney.in

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