Increase retirement funds' equity exposure for greater good: Study

There is a need to increase the asset allocation to equity allowed in retirement funds from the current level of five per cent as it will help in realising the country's huge demographic advantage, a 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," the joint study titled 'For greater good' by industry body Associated Chambers of Commerce and Industry of India (Assocham) and Crisil stated.

"The global exposure level is much higher - in OECD (Organisation for Economic Co-operation and Development) countries, like Canada and the United States, for instance, the average is near 30 per cent, it is imperative, therefore, to increase this exposure level," it said.

The study highlighted that according to a global analysis of investments, the OECD countries, despite having an ageing economy, 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 of India's population is in the working age group, 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," the study said.

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, the study said.

But, the risks tend to level out over the long term, it added.

According to an analysis, equity has the ability to generate stable positive returns over the long term, evidently as the 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.

It also noted that being one of the fastest-developing economies, India certainly presents a positive case for equity investment.

The study suggested 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 suggests 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.

"Exempt trusts need to address this, by putting in place requisite infrastructure and expertise,"it said.

--IANS

mm/in/vt