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How EPFO made Rs 68,000 crore off your retirement money by investing in exchange traded funds

Retirement fund body has seen rise in earnings from capital gains from equity. Its earnings are distributed among its subscribers, with EPFO retaining a small surplus.

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New Delhi: Union Minister of State for Labour and Employment Rameswar Teli informed Parliament earlier this week that the Employees’ Provident Fund Organisation (EPFO) has made Rs 67,619.72 crore by investing in exchange traded funds (ETFs) till 31 March this year. He also said that on an average, the retirement fund body has invested Rs 36,000 crore in ETFs every year since 2019-20.

An ETF is like a mutual fund, where investments of different individuals are pooled and handled by a portfolio manager. Each ETF tracks a particular index, sector, or commodity. But unlike a mutual fund, an ETF can be purchased or sold on a stock exchange the same as regular stock.

These returns that the EPFO has made in ETFs have not been realised and are calculated using the current notional market value of these investments till the end of the last financial year, which stands at Rs 2,26,919.18 crore. “All investments are done as per the pattern of investment notified by the government,” the minister said in a written reply to the Lok Sabha.

Teli also informed Parliament that the EPFO has invested a total of Rs 84,477 crore in the current financial year (up to 30 June) in both equity and debt instruments. Of this, around Rs 12,199 crore is invested in ETFs.

There have been discussions among members of the EPFO’s Central Board of Trustees (CBT) on increasing the exposure of EPFO funds to equities, a senior official in the labour ministry, who did not wish to be named, told ThePrint. However, the proposal was met with some resistance from some of the trustees who feel that it would not be wise to make this move, given the current volatility in stock markets, the official added.

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How EPFO made these gains

In August 2015, the CBT of the EPFO decided that the retirement fund body will invest 5 per cent of its incremental deposits in ETFs of Nifty and Sensex to maximise returns. A month later, the board decided that allocation of investment for Nifty-based ETF would be 65-85 per cent, and the allocation for Sensex-based ETF would be 15-35 per cent.

The upper limit of 5 per cent was enhanced to 10 per cent of annual investments in 2016, and then again to 15 per cent in 2017. The remaining 85 per cent is invested in debt instruments including in government securities.

A majority of EPFO’s earnings come from the interest accrued from investments in debt instruments. But as a result of the EPFO diversifying its investment portfolio, the retirement fund body has seen a rise in earnings from the capital gains from equity in recent years.

Its earnings are distributed among its subscribers, retaining a small surplus from the accumulated corpus of the fund. 

Last year, Union minister Teli had said in a written reply to Parliament that the notional return on EPFO equity-related investments rose by 16.27 per cent in FY 2021-22 from 14.67 per cent in FY 2020-21.

To put this in context, since investments in ETFs are equity-linked and based on benchmark indices, in the last five years since January 2018, Sensex has risen around 73 per cent and Nifty around 67 per cent.

In the last five years, the average return on investments in Sensex and Nifty companies (till 31 March 2022) has been 18 per cent. In comparison, return on debt instruments — bond yields — has been around 6.8 per cent on average over the same period.

EPFO’s investment pattern

Since the corpus lying with EPF belongs to its subscribers, who consider this money as their retirement savings, the retirement fund body has to be careful with its investments. This is perhaps why the bulk of this money is invested in government securities.

EPFO invests 85 per cent of its funds in debt instruments and the remaining 15 per cent in ETFs, in accordance with the investment pattern notified by the Centre.

The investment in ETFs is made on the basis of Nifty 50, Sensex, Central Public Sector Enterprises (CPSEs) and Bharat 22 Indices.

Earlier this year, the CBT of the EPFO announced that it would give returns of 8.1 per cent to its subscribers in 2021-22 — lowest in the last four decades.

The retirement fund body redeems a portion of the invested corpus when it announces the interest rate on EPF towards the end of each financial year.

The yield on the 10-year benchmark bond is currently hovering around 7.5 per cent, however, the yields were lower in the last two years since central banks across the globe maintained ultra low interest rates to boost demand.

The retirement fund body also has limited exposure to non-government debt securities such as corporate bonds. Generally, AAA-rated corporate bonds generate higher returns than government bonds. In the last five years (till March 2022), there has been a difference of at least 90 basis points in the yields of government and corporate bonds with a hundred basis points being one percentage point.

Divided views on EPFO increasing investment in equities

The Finance Investment and Audit Committee (FIAC) of the EPFO had recommended in July this year that the investment in equities can be increased from the current 15 per cent to 20 per cent, to balance the risk and return on these investments since equity investments generate better returns over a longer term period. 

This proposal, however, met with stiff resistance from some of the trustees at the CBT’s July meeting. To justify their concerns, these trustees — who are also representatives of some employee unions — cited strong volatility in the stock markets due to geopolitical risks emanating from the Russia-Ukraine conflict that has led to a spike in international crude oil prices.

Politically, the trustees feared that such a decision could create unnecessary uproar in Parliament since it concerns the life savings of around 24 crore EPFO subscribers.

(Edited by Amrtansh Arora)

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