Retirement funds should double the asset allocation to equity if India is to realise the huge demographic advantage, says an ASSOCHAM-Crisil joint study released on Thursday.
Currently, pension funds are permitted to allocate 5 per cent to 15 per cent in equity. "At 5 per cent, overall exposure to equity could barely reach 5 per cent in 20 years, and even if allocation was increased to 15 per cent, it may take three more years to cross the 5 per cent overall mark," highlighted the study titled 'For greater good'.
The global exposure level, according to the study, is much higher. In OECD countries, for instance, the average is near 30 per cent.
Not denying that equity investments are fraught with risks and require relevant infrastructure and risk management expertise, which these bodies may not possess, the study points out that the risks, however, tend to level out over the long term of such funds.
The study saw much bigger opportunity for exempt trusts since they have greater flexibility to invest compared with Employees’ Provident Fund Organisation (EPFO), and suggested appointment of professional fund managers to take apt investment decisions for the retirement fund body. 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, was another option.
The study has suggested the exempt trusts emulate the EPFO to adequately monitor and professionally manage the investments with sound investment, governance practices and processes.
As of now, most exempt trusts have only a rudimentary form of investment management—operating largely on the basis of advice at the time of investment.
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 aging 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 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 study.
According to an analysis, equity has the ability to generate stable positive returns over the long term, evidently as the Sensex has not given negative return in 15-year period, and 93 per cent of the times it has given more than 10 per cent returns.
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.