EPFO investing in CPSE ETF: What it means for you
MUMBAI: The Employees’ Provident Fund Organisation (EPFO) manages the savings of 170 million salaried individuals and any investment decision it makes has a direct impact on the returns that they earn or will earn in the future. This week, the government launched the second tranche of the Central Public Sector Enterprises’ exchange traded fund (ETF) to raise ₹6,000 crore. An ETF is a basket of securities that tracks the stock prices of the companies of an underlying index, and is traded on the exchanges.
EPFO’S EQUITY PUSH
EPFO started investing in stocks in August 2015, and initially allocated 5% of its corpus for equity-related investments, short of the 15% it was allowed by rules to invest. The EPFO, with over ₹7.5 lakh crore of assets under management, between August 2015 and end-June 2016, invested ₹7,468 crore in ETFs in two schemes — SBI-ETF Nifty and SBI-ETF Sensex. In 2015-16, EPFO invested ₹6,500 crore in the ETFs. In 2016-17, the EPFO will invest 10% of its corpus, or about ₹13,000 crore, in equities through ETFs. The investment in the CPSE ETF will also come from this amount.
INVESTING IN ETF
Financial planners say exposure to equity instruments can boost overall returns for the fund. In the current market scenario, the EPFO should invest up to 15% of its incremental corpus in equities, said Prakash Praharaj, an investment adviser registered with the Securities and Exchange Board of India. “Equity is expected to give good returns over the next 3-4 years.”
That being said, the EPFO has recommended a lower interest rate for 2016-17 — a 15 basis-point cut for the EPF to 8.65%, from 8.8% in 2015-16. One basis point is one hundredth of a percentage point.
So, when can we see the impact of equity investments in our returns? Not anytime soon. The corpus is too small to influence the overall return at the moment. Moreover, returns will be visible only over a long period. “The returns cannot be taken into consideration until they actually sell these investments. It can happen only over the medium to long term, when the fund decides that it wants to book profit,” Praharaj said.
Besides, the EPFO is yet to devise a method to account for the returns it earns from these investments. Till then, equity returns don’t have a bearing on the interest rate it sets.