Subpar returns from ETFs put EPFO in a spot

NEW DELHI: The decision of the Employees’ Provident Fund Organisation (EPFO) in 2017 to invest in select exchange-traded funds (ETFs) to help the government meet its disinvestment targets has yielded subpar returns for its subscribers.

Two days before announcing the annual EPF interest rate, calculations by the retirement fund manager show that its investments in the ETFs of central public sector enterprises (CPSEs) and Bharat 22 have yielded just 1.89% and 0.48%, respectively, as of 31 December, according to official documents reviewed by Mint.

That compares unfavourably with the yields on ETFs run by SBI Asset Management Co. and UTI Asset Management Co. for the retirement fund manager. While the SBI mutual fund ETFs returned an average of 12%, the ETFs run by UTI have yielded 10.31% as of December 31, 2018 since EPFO started investing in ETFs in August 2015. The issue is likely to be discussed at the central board meeting of EPFO on Thursday.

EPFO, which works under the Union labour ministry, first invested in the CPSE ETF in January 2017 on the prodding of the finance ministry.

“The ministry wanted us to invest ₹3,000 crore, but we have agreed to invest ₹2,800 crore as of now,” the then central provident fund commissioner, VP Joy, had said in an interview in January 2017. “Mindless investment to achieve goals of the government always has its shortcomings. EPFO has to understand that there is a difference between investors investing by informed choice, and poor workers’ money getting invested by compulsion through substandard ETFs,” said AK Padmanabhan, a central board trustee of EPFO.

As of now, EPFO has invested in CPSE ETFs in three tranches beginning January 2017 and in Bharat 22 ETF in two tranches beginning November 2017. Overall, in both these instruments, the retirement fund body has invested a total of ₹5,507 crore.

Experts said the two government-sponsored ETFs are unsuitable for investments by pension funds.

“Bharat 22 ETF or CPSE ETF are simply not good investment vehicles. They are tailored for achieving government goals, not EPFO subscribers’ goals. It’s not the right choice,” said Suresh Sadagopan, founder of Ladder7 Financial Advisories.

“I don’t see a lot of merit in such investments, that too when there are enough broad-index ETFs available to invest in.” The EPFO administration is likely to consider further investments in ETFs at the Thursday meeting, an EPFO central board member said on condition of anonymity.

A labour ministry spokesperson declined to comment.