EPFO sells a portion of equity to maintain 8.65% interest rate
THE MOVE, WHICH COMES AHEAD OF ITS ANNUAL INTEREST RATE DECLARATION, MAY HELP EPFO OFFSET RELATIVELY LOW RETURNS FROM DEBT INVESTMENTS THIS YEAR
retirement fund manager, the Employees Provident Fund Organization (EPFO), has booked a profit of over ₹1,000 crore by selling some of its equity investments to maintain interest rate at the same level as last fiscal, said two officials in the know.
The move, which comes ahead of its annual interest rate declaration, may help EPFO offset relatively low returns from debt investments this year, two officials aware of the matter said.
If EPFO pays 8.65% this year, the same as last fiscal, it will be considered a net positive for subscribers in the current market situation, especially when other PF and small saving rates including Public Provident Fund (PPF) and Government Provident Fund (GPF) rates are going down.
PPF and GPF earned 7.6% rate in the current quarter.
“The organisation has encashed its first tranche of equity investments it made in 2015. Along with the dividends it received in 2017, its capital gain from equity sale has come to ₹1,053.75 crore,” said Prabhakar Banasure, EPFO’s investment finance committee member, one of the two people mentioned earlier.
Of this, ₹771 crore profit has come from selling a portion of its equity holdings in exchange traded funds that mimic Nifty, and ₹241 crore from the Sensex ETFs.
“The general sentiment is EPFO should not pay less than 8.65% interest rate in 2017-18. But the debt investments including government bonds have given a lower yield this fiscal. The equity gains that EPFO has made will be utilized to buffer the shortfall,” said the second official mentioned above, seeking anonymity.
This fiscal year, EPFO is investing 85% of its annual accruals in the debt market and 15% in equities through exchangetraded funds.
In 2016-17, its debt market exposure was 90%. Besides government debt securities, it also invests in corporate bonds and bank fixed deposits.
The second official said as government bond yields earned an interest of between 6.5% to 7.75% in 2017, it created the need for encashing portion of ETFs. For example, Axis Bank raised ₹5,000 crore through a sale of Basel-III compliant bonds to EPFO at a coupon rate of 7.66%, Mint reported on June 15. Axis Bank then said this is the “lowest coupon rate so far on the Tier-II bonds of any private sector bank”.
To be sure, the final earnings are being calculated and the Central Board of Trustees of the EPFO headed by the labour minister will take a final call and announce the interest rate next week.
Banasure said since EPFO went to stock market to improve its earnings, lowering the interest rate will be criticised.
Banasure said that since EPFO went to stock market to improve its earnings, lowering the interest rate will be criticised. The stock market has gained significantly over the last two-and-ahalf years, and the overall equity investments of EPFO were estimated to have gained 16% by the end of January.