The Employees’ Provident Fund Organisation (EPFO) wants to up its investments in the equity market, given the much higher returns relative to conventional instruments like government securities fetched from its limited exposure to stocks in the last couple of years. Currently, the EPFO can invest up to 15% of incremental deposits of around Rs 1.5 lakh crore annually in exchange-traded funds (ETFs). “We have to step up investment in ETFs. Otherwise it will be difficult to pay higher returns to our subscribers,” Central Provident Fund commissioner VP Joy told FE. Between August 2015 — when it started investing in stocks — and October this year, the EPFO has put a little over Rs 32,000 crore in ETFs. Joy said by the end of the current fiscal, it will have invested Rs 45,000 crore in these funds. EPFO’s returns from the equity market fetched annualised return of 21.87% till October-end, over three times what it received from its investment in corporate bonds.
As per the changed investment pattern notified in April 2015, the retirement fund body can invest up to 15% of its annual incremental deposits in the equity market. In the first year when it started putting money in equities, the EPFO invested 5% of its incremental deposits in ETFs and doubled it to 10% in the subsequent year. The Central Board of Trustees (CBT), the highest decision-making body of the EPFO, in June this year gave its approval to enhance the limit to 15% for the 2017-18 fiscal.
The EPFO can invest between 45% and 55% of the incremental fund flows in government securities, 35-45% in debt instruments and related investments, up to 5% each in short-term debt instruments and “asset-backed, trust-structured and miscellaneous investments”. Initially, the EPFO selected SBI Mutual Fund to do the fund allocation on its behalf in the market, later adding UTI Mutual Fund. Currently, the ratio of allocation of funds between SBI MF and UTI MF stands at 7:2.
The EPFO is under tremendous pressure to maximise returns from its investments. Depending on its return on investments, it EPFO pays its 4.7 crore subscribers interest on their deposits. Sensing that it would be left with only a meagre surplus, the retirement fund body pruned the interest rate on provident fund deposits for its subscribers to 8.65% for 2016-17, the lowest in four years. However, it still continues to be the most preferred fixed-income instrument over all other debt instruments including PPF, senior citizen savings scheme and bank deposits. The interest rate for PF deposits this year is yet to be determined by the CBT.