Keen on diversifying its investments in exchange traded funds (ETFs), the Employees’ Provident Fund Organisation (EPFO) is considering investing in Nifty Next 50 and Sensex Next 50, as these indices have historically yielded higher returns than Nifty 50 and Sensex 50 stocks, where the retirement fund has been investing since its debut in the market in 2015.
Sources said the proposal was put up for discussion and approval before the Central Board of Trustees (CBT) last month, but the apex body wanted to further examine the matter. After CBT’s approval, the EPFO would need to get the government’s nod to include new indices in the notified pattern of investment.
While EPFO’s return from equity investments had been around 20% till February 21, 2018, the retirement fund body wanted to widen the basket to optimise return with minimum risk. The EPFO currently invests 15% of its annual incremental receipts of `1.5 lakh crore, from over five crore active subscribers, in the stock market through ETFs.
Sensing that it would need to invest more to ensure a similar kind of returns to its subscribers in the falling interest regime, the retirement fund invited suggestions from Asia Index, a 50:50 JV between S&P Dow Jones Indices, the BSE India and India Index Services & Products, a subsidiary of the NSE, to guide it on broadening the basket.
Under pressure to maintain a balance between interest earned from its investments and interest outgo to its subscribers, the EPFO has lowered the rate of interest on EPF to 8.55% for 2017-18, down from 8.65% in the previous fiscal. Had it not earned return of Rs 1,011 crore by selling ETFs worth Rs 3,700 crore, the rate of interest could have been lower. The EPFO has so far invested around Rs 44,000 crore in ETFs.
Asia Index has suggested that the EPFO should invest in Sensex Next 50 and BSE Medicap Select as they yielded higher annualised returns amid volatility over the Sensex.
India Index Services & Products suggested that the EPFO should invest in Nifty Next 50 since it has a well-diversified portfolio and has historically outperformed the Nifty 50 with a higher return to risk ratio for longer periods.
“Nifty Next 50 index represents the performance of ‘next’ 50 stocks in the pool of large capitalisation stocks which come after the top 50 in order of free float market capitalisation, subject to index criteria. The Nifty Next 50 thus represents companies which are at present below the Nifty 50 index constituents and may be potential candidates for inclusion in Nifty 50 in future, subject to index criteria,” the NSE subsidiary said.