So far, EPFO has invested over ₹ 47,431 crore in stocks, and now it wants to diversify further and plans to seek finance ministry approval for the same. Photo: Mint
Since August 2015, India’s retirement fund manager—the Employees Provident Fund Organisation (EPFO)—has gradually increased its investment in the stock market. So far, EPFO has invested over ₹ 47,431 crore in stocks. Now, it wants to diversify further and plans to seek finance ministry approval.
What’s the new plan?
Since the Employees’ Provident Fund Organization (EPFO) invests around ₹ 20,000 crore every year in equities, it thinks concentrating on just two categories of exchange-traded funds (ETFs)—Sensex ETF and Nifty ETF—will hinder its earning potential due to lack of diversification. It has now zeroed in on three more categories of ETFs—Nifty Next 50, Sensex Next 50 and BSE MidCap Select. Once implemented, the move will let EPFO invest in more listed firms, reducing the risk of concentration in a couple of ETFs.
Who will benefit?
Diversification is aimed at giving better returns to millions of EPFO subscribers. Earlier this year, EPFO booked a profit by selling equity worth ₹ 2,500 crore to buffer its earnings and offer 8.55% interest rate to subscribers. Diversification will also turn some ETFs from minuscule funds to asset-heavy funds. For example, SBI ETF Nifty 50, where EPFO invests right now, had an asset size of ₹ 35,107 crore as of May-end. In comparison, SBI ETF Nifty Next 50 fund has an asset size of just ₹ 13 crore, and UTI Nifty Next 50 ETF ₹ 52 crore, according to Value Research.
Will diversification bring more volatility?
Yes. Investing in Nifty Next 50, Sensex Next 50 and BSE MidCap Select ETFs will bring more risk over a one, three and five-year time horizon, as per EPFO estimates. But the fund feels risk will be less and risk-adjusted return will be better over a 10-year period. Critics say that in an uncertain job market like India’s, where lakhs of people withdraw their PF money every month, investing in more risky assets will impact their returns.
How will EPFO pay returns from debt and stock investments?
PF account statements will have two segments—fixed income investments and units from equity investments. The fixed income investment portion will be disclosed as per existing norms. The equity investment part will show total equity investments, number of ETF units accumulated, real-time NAV of ETF units and present value of investments.