EPFOs gets nod to invest redemptions in ETFs
Per government mandate, EPFO is allowed to invest anywhere between 5 to 15% of its corpus in equity instruments. However, this ceiling has never been utilized by EPFO, with its maximum investment going just a little over 10%.
The Employee Provident Fund Organisation (EPFO) has finally received the finance ministry’s assent to reinvest its proceeds from sale/redemptions of investments in equities and other related products, effective August 4, 2023.
As per data from August 2023, 91.3% of EPFOs total corpus is parked in relatively risk-free debt instruments. Only 8.7% is invested in exchange traded funds (ETFs), which is the only exposure EPFO has to equity markets.
As per reports, EPFO invests in ETFs that mirror the performance of prominent indices like BSE Sensex and Nifty 50. Additionally, EPFO also invests in ETFs that are created with the specific intention of divesting government shareholding in India Inc. But now, with an increased focus on equity instruments, EPFO is looking to target better returns and a larger investible domain for its corpus and subscribers.
Per government mandate, EPFO is allowed to invest anywhere between 5 to 15% of its corpus in equity instruments. However, this ceiling has never been utilized by EPFO, with its maximum investment going just a little over 10%.
That is because since provident funds work as an individual’s financial cushion for retirement, the government wants to maintain a cautious, debt-heavy approach, focusing more on capital protection rather than its appreciation. For the financial year 2022-23, individuals having EPF accounts received interest at the rate of 8.15% p.a.
However, investment trends over the years highlight EPFOs growing affinity towards ETFs and equities. As of 31st July, 2023, EPFO has set aside Rs 13,017 crores for investment in ETFs. This figure has risen from Rs 27,974 crores in 2018-19 to a massive Rs 53, 081 crores in 2022-23.
In addition to this, EPFO has also proposed a host of other changes to its structure. One of this includes allowing daily redemption of ETF units instead of the current norm of only periodic redemption. Another proposal involves changing the ETFs benchmark from the current average four-year Sensex returns to a five-year period.