If you are a salaried individual, a portion of your salary may be invested with EPFO (Employees Provident Fund Organization). Like this, approximately 5 to 6 crore salaried individuals are contributing to EPF Scheme.
EPFO has a 64 year long history and all these years it has been investing only in safer debt instruments (Fixed income securities). The EPF subscribers on an average have been receiving 8 to 9% interest rate for the last many years or so.
Considering the inflation which has been hovering around 6% to 8% for the last few years, the expected returns from a long-term oriented fund like a Pension fund should be much higher than what it is offering to its subscribers. To achieve this, the PF organization has to participate in Indian Equity markets.
After dilly-dallying for several years, the EPFO has started investing in Equities as an Asset class from 6th August, 2015. This is the first time ever that it is investing a part of its corpus in the Stock market.
EPFO & the First Step
- As of today, EPFO has a total corpus of Rs 8.5 Lakh crore in its kitty.
- The average incremental flows that are expected every year are around Rs 1 Lakh crore.
- EPFO can now invest 5% of the ‘incremental inflows’ i.e., around Rs 5,000 crore in Equity markets. In other words, between 6th August and 31st March 2016, EPFO will pump in between Rs.5,000 crore and Rs.6,000 crore in the stock market.
- The PF trusts can also invest in equities. This could take the EPFO’s investment in equities during this Financial Year to Rs 7,000 to Rs 8,000 crore.
- The Exempted establishments (PF Trusts) have been given the freedom by EPFO to invest up to 15% in equities if they wish to.
- EPFO has chosen Exchange Traded Funds as the mode of investing in equities.
(What are ETFs? An ETF comprises a clutch of stocks that reflect the composition of an index, such as the S&P CNX Nifty or BSE Sensex, and are traded on stock exchanges like company stocks.)
EPFO & ETFs (Exchange Traded Funds)
So, where is EPFO investing a portion of your money?
- The investment in Equities is being routed through ETFs managed by SBI Mutual Fund.
- EPFO believes that transparency, liquidity, diversification, flexibility and cost effectiveness are the advantages of investing in ETFs.
- To start with EPFO will invest;
- 75% of incremental flows in SBI Nifty ETF and
- 25% in SBI Sensex ETF.
(SBI Nifty ETF was launched in July 2015. SBI Sensex ETF was launched in Mar,2013. It has given around 24% return in last two years)
- SBI fund house will charge 0.005% as its fund management fee.
- EPFO has clarified that it will not invest in Gold ETFs.
- The EPFO is planning to invest this money systematically every month or as a lump sum, as and when it feels it’s appropriate to do so.
The idea of EPFO getting into equities was first mooted way back in 2005. But it was never implemented. Also, in April 2015, the Labor Ministry of India has issued a notification directing the EPFO to invest 5 to 15% of its incremental corpus in equities. But, the EPFO’s Central Board has finally decided to stick to just 5% for this Financial Year and then take a call depending on the performance of the fund.
The Rs 5,000 crore investments by EPFO in share markets will definitely bring some cheer in financial markets. But, this amount is way too small when compared to LIC’s investments in equities which were around Rs 47,000 crore in 2014-15.
The main purpose of investing in Equity markets by EPFO is to generate better returns over long-term. A Pension fund is long term oriented one and in long-term equities has outperformed most of the asset classes. I believe that unless the equity part rises to about 10 to 25% of the total corpus, it’s impact will be irrelevant to that purpose (goal).
I believe that the EPFO has to invest more than 5% of its inflows in Equities to provide decent inflation adjusted returns to its subscribers. If 95% of its money is invested in Fixed Income Securities and only 5% in equities (that too only 5% of its incremental inflows), it is a tough task to generate better returns.
Also, the Sensex ETF and Nifty ETF may generate returns which are in line with the broader market returns. These funds may not outperform the funds like mid-cap oriented or say Equity diversified funds.
Nevertheless, EPFO’s decision to enter Equity markets is an historic one and we need to welcome it. Also, most of the salaried employees in India have limited means to invest in stocks on their own, so EPFO investing a small amount in Equities is good for them.
As the saying goes, ‘Something is better than NOTHING’ & ‘Better late than NEVER’. The 5% limit is very low, but it is a very good beginning.
Do you think that this is a good move by the EPFO? Kindly share your views. Cheers!