The Employees’ Provident Fund Organisation (EPFO) has started discussions with the finance ministry to invest all of its redemption proceeds from exchange-traded funds (ETFs) back into the stock market. It has proposed measures that would maximise equity returns while shielding gains from market volatility, said people with knowledge of the matter.
The central board of trustees, the EPFO’s apex decision-making body, had at its meeting in the last week of March allowed the EPFO to reinvest its redemption proceeds from its investments in ETFs.
Read More: Aeroflex IPO hits jackpot; Subscribed 97.11% times
Such a measure, which would further step up the flow of retirement funds into equities, has to be approved by the finance ministry. As per the finance ministry’s investment guidelines, the EPFO can invest between 5% and 15% of its income in equities and related investments.
The EPFO is seeking other changes to the ETF investment guidelines.
103038329
Benchmarking returns
It has proposed the redemption of ETF units daily, linking the return threshold to government securities, against periodically now. This also involves benchmarking ETF returns to the average five-year returns of the Sensex against four years now, officials familiar with the development told ET.
Read More: Rishabh Instruments IPO to open on Aug 30; Price band, lot size and other details
Once the finance and labour ministries reach a consensus on the matter, the retirement fund body will move the final proposal for the finance ministry’s approval.
According to one of the officials who spoke on condition of anonymity, the EPFO is of the view that the holding-period return of the ETF units that are proposed to be redeemed should be higher than that on the 10-year benchmark government security by over 100 basis points.
“Further, EPFO has also proposed that the holding-period returns of the units to be redeemed should be calculated on the basis of average five-year returns of the Sensex and they must be allowed redemption on a daily basis,” the official added.
Read More: Adani Group deployed more than Rs 2.36 trillion worth equity as of FY23
This would benchmark ETF returns to historical long-term averages against the existing redemption period of four years, ensuring better returns for subscribers. Currently, EPFO redeems the units periodically.
The labour ministry and EPFO didn’t respond to queries.
The retirement fund body began investing 5% in ETFs based on the Nifty 50 and BSE Sensex in August 2015 and subsequently raised the limit.
It has invested 10% of its proceeds in ETFs as of January 31, but it hopes to achieve the maximum permissible limit of 15% soon if the Centre allows it to reinvest its redemption proceeds back into the ETF.
The EPFO has an investment corpus of ₹12.53 lakh crore, of which about ₹1.25 lakh crore is in equities and related investments.
