There is a need to increase the asset allocation to equity allowed in retirement funds from current level at 5-15 per cent of incremental flows as it will help in realising the country’s huge demographic advantage, an ASSOCHAM-Crisil joint study has said.
“At five per cent, overall exposure to equity could barely reach five per cent in 20 years, and even if allocation was increased to 15 per cent, it may take three more years to cross the five per cent overall mark,” highlighted the ASSOCHAM-Crisil joint study titled ‘For greater good.’
“The global exposure level is much higher – in OECD countries, for instance, the average is near 30 per cent, it is imperative, therefore, to increase this exposure level,” it said.
The opportunity is much bigger for exempt trusts since they have greater flexibility to invest compared with EPFO, further stated the study.
“There is no denying that equity investments are fraught with risks and require relevant infrastructure and risk management expertise, which these bodies may not possess. But, the risks tend to level out over the long term,” it added.
The study suggested for appointing professional fund managers to take apt investment decisions for the retirement fund body.
“Besides, they can consider outsourcing this risk management function to independent third-party investment analytics firms which have no conflict of interest, and which can guide and monitor investment management,” it said.
The study has suggested the exempt trusts to emulate the Employees’ Provident Fund Organisation (EPFO) to adequately monitor and professionally manage the investments with sound investment, governance practices and processes.
This is because most have only a rudimentary form of investment management at the moment – operating largely on the basis of advice at the time of investment. “Exempt trusts need to address this, by putting in place requisite infrastructure and expertise.”
It also said that PFs need to define investment policy in a well-articulated manner, clearly charting out roles and responsibilities of the investment team and committee, the investment universe, the monitoring framework for exposure limits at rating, issuer and sector levels and framework for performance and portfolio review.
Regular and independent review of portfolio by experts can help. And since credit quality of issuers forming part of the portfolio needs constant vigil, early warning systems for credit assessment can be put in place.
The study highlighted that as per a global analysis of investments, the OECD countries, despite having an ageing economy, they continue to remain strongly invested in long-term asset classes like equity and even the non-OECD countries are putting their demographic advantage to better use by investing in equities.
In India, however, pension assets are predominantly invested in debt. This is despite the demographic advantage the country has and is expected to enjoy over a long term.
Currently, 44 per cent India’s population is working age, and this is estimated to become 48 per cent by 2050.
“The young population has a long-term investment horizon, which calls for greater allocation to long-term asset class (such as equity) for wealth creation to meet the needs in sunset years,” suggested the ASSOCHAM-Crisil study.
According to an analysis, equity has the ability to generate stable positive returns over the long term, evidently as the S&P BSE Sensex has not given negative return in any 15-year period, and 93 per cent of the times given returns more than 10 per cent.
Besides, in the 10-year investment horizon, 82 per cent of the times returns have been more than 10 per cent.
“To be sure, as the investment horizon increases, the volatility in equity returns decreases significantly,” said the study.
It also noted that being one of the fastest-developing economies, India certainly presents a positive case for equity investment.