Why your investments don’t make money for you?
Don’t be fooled by the belief that your EPFO and LIC contributions will pay you handsomely
We are living in the all-time high season—the markets, equity inflows in mutual funds and the heat wave. I have started receiving more mails asking about investing now, when the markets are up. I am reminded of what someone once said: “You know it is the time to get out of your investments when the local panwalla starts talking about the stock market.” We are not there yet, but the effect of a rising stock market is such that everyone, even those who has never been an investor, gets curious. Some even blindly jump into investing.
A conversation with a visitor to my office a few days ago, made me wonder the kind of wrong notion that many people carry when it comes to their monies. So, this 50-something gentleman with several years of work experience was talking favourably about the EPFO increasing its share in the stock markets, by committing an additional Rs 18,000 crore in stocks in the current financial year.
I assumed he was happy—at least the next generation of EPFO members may see some more money coming their way. But, I was horror-stuck when he rattled how next year the EPFO will pay him more because of these stock market investments it is making. The effect of reading about LIC booking a 72 per cent profit at Rs 19,000 crore from equity investments in 2016-17, was similar on him. He had assumed the bonus on the numerous LIC policies that he holds, will suddenly land up paying him a lot more money. Herein resides the fundamental flow of non investors assuming they will benefit from stock market runs, despite not participating in them.
Don’t be fooled by pooled money
Scores of people put their money in LIC policies because they are blinded solely by the bonus and money back that comes to them as policyholders. Many of them have been disappointed about the lower bonuses that they are earning in recent years. Bonuses are linked to how the pooled investment by the corporation fares. What the majority of policyholders and EPFO members forget is that individually the profit or the investments these entities make seem huge, but when it is distributed across beneficiaries, it is meagre.
To better understand why you don’t make sizeable profits even when the underlying investment gains, you should understand the difference between unitised and non-unitised financial instruments. The unitised investment, like mutual funds, NPS and Ulips convert your investments into units. This way, it becomes easy to know proportionate investments and benefits to share. Basically, unit holdings become the reference point for both investments and share of profits.
However, in a pooled system, the quantum of your contributions is never clearly captured for you to get a reciprocal or equal share of the gains. The EPFO investment and traditional LIC endowment and moneyback type products fall under this head. This is why, despite the Rs 19,000 crore gain from equities by LIC; the bonus you earn on your policy may be too less for any meaningful gain.
The total investment of LIC alone is over Rs 23 trillion in the stock markets, which is more than the total assets managed by the mutual fund industry. In fact LIC booked profits to the tune of Rs 65,000 crore in 2014-15, which pales the profit booking in 2016-17. The EPFO is yet to book profits, but after a rather disastrous first year investment in the stock markets, the value of its investments has gained significantly.
When long term investing fails
LIC has been investing in the Indian markets for very long, but rarely have I come across the gains on an LIC policy closer to 16-17 per cent, which is the long-term average return of the S&P BSE Sensex. Both LIC and the EPFO are institutions with very long history, in fact they have been present from times before the BSE Sensex base year of 1970 with the index at 100 came into existence. Yet, for members the earnings from these instruments have not built wealth.
Yes, there was a time in the 1990s, when the EPFO returns and LIC bonuses were in double digits, but that was because of both benefiting from a higher guaranteed returns environment. Moreover, unlike mutual funds or the NPS, where there is a clearly stated investment objective; there is no such stated objective for your contributions or investments in the EPFO or LIC policies. Yes, the objective of insuring your life rests with LIC policies and contributions towards retirement is mentioned by the EPFO; but there is nothing that defines how the monies will be put to use.
For years, both these instruments were among the biggest of Ponzi schemes. New entrants paid for those who were exiting these instruments after the natural completion of their tenures. Things are changing for both these institutions with the largest set of retail investor base realigning its focus on members and policyholder interests. But, if you are thinking that you will be benefiting from the recent market gains because you contribute to both these institutions—it is not going to be the case for now.