What has been EPFO’s experience with equity investing?

Millions of private sector employees deposit their money with EPFO ​​to ensure a hassle-free retirement. But do you know where the Employees Provident Fund Organization or EPFO ​​invests this money to give you these good returns. And do they also invest in stocks?

The government recently told parliament that the pension fund body invested Rs 1.59 trillion in exchange traded funds (ETFs) in March 2022 and the investments are now worth Rs 2.26 trillion. This means that EPFO ​​theoretically earned Rs 67,000 crore from its investments in ETFs. ETFs are funds that track the performance of indices such as Nifty or Sensex. But unlike mutual funds, ETF shares are publicly traded.

EPFO’s total corpus is between 16 trillion and 17 trillion rupees, according to the latest available data. And he has traditionally been a big debt investor. Currently, the pension fund organization invests 85% of additional deposits in debt securities, primarily “AA” or higher. EPFO’s debt investments are worth around Rs 14.46 trillion.

From 2015, the government allowed him to invest 5% of investable deposits in shares. Currently, the fund organization invests up to 15% of its investable deposits in ETFs. It is also allowed to invest directly in listed shares of companies with market capitalization exceeding Rs 5,000 crore. However, it only invests in ETS and not in individual stocks.

Investment in ETFs is done based on Nifty 50, Sensex, Central Public Sector Enterprises (CPSE) and Bharat 22 indices. 31,500 crore in FY20 in ETFs.

The objective of EPFO’s investments in equities was to provide good returns to its subscribers over the long term. An analysis shows that equity markets have given higher returns than debt markets. Over the past five years, the average return on investments in Sensex and Nifty is 18%, while government debt and top-rated corporate returns stood at 6.8% at the end of March.

On the other hand, EPFO’s debt investment return was 6.78% in FY21 and 7.5% in FY20. It was 8.5% in FY2019. According to the government, the fund body’s theoretical equity returns on investments linked to EPFO ​​shares increased from 14.6% in FY21 to FY16 % in fiscal year 22.

Some experts say EPFO’s allocation to equities has been rather conservative. According to a joint annual study by the Thinking Ahead Institute and Pensions & Investments, the top 20 global funds have on average invested around 41.7% of their assets in equities. While funds from North America, Europe and other regions invested a majority share in equities, funds from Asia-Pacific largely allocated assets to fixed income investments.

So, do restrictions around equity investments reduce the potential for higher and more sustainable savings patterns for the body?

Deepesh Raghaw, Registered Investment Adviser, www.PersonalFinancePlan.in says there is always a likelihood of increasing or decreasing exposure to EPFO ​​shares. But the risks must also be associated with the investor and not with EPFO ​​or the government.

The safe investment bets, mainly in fixed income instruments, are also mainly due to the largely unpredictable nature of the markets and the fact that the EPFO ​​must offer fixed interest returns year after year at its basis of more than 60 million subscribers, regardless of the underlying returns of its portfolio. There are reports that the equity allocation could reach more than 20%, but the government has so far rejected such a proposal.

Prasanna Deokar, Director – India Investments, Mercer Consulting, says underwriters are not taking full advantage of EPFO’s equity benefits. Member choice in equity investing could be one way forward.

Opinions are divided as to whether EPFO’s equity investments are conservative. However, in the long run, the EPFO ​​may need to move beyond ETFs that track two major national indices and make more diversified equity investments. The pension fund may also consider global diversification of the overall portfolio.

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