EPFO Seeks to Optimize ETF Investments for Strong Returns.

epfo

The Employees’ Provident Fund Organisation, commonly known as **EPFO**, is exploring ways to boost its returns by reinvesting the redemption proceeds from exchange-traded funds (ETFs) back into the stock market. This strategic move is aimed at maximizing equity returns while safeguarding gains from market fluctuations, according to sources familiar with the situation.

EPFO’s Strategy for Maximizing Returns

The EPFO’s apex decision-making body, the central board of trustees, granted approval during its late-March meeting to reinvest the redemption proceeds derived from ETF investments. However, this initiative, which could further bolster the flow of retirement funds into the equity market, awaits approval from the finance ministry. As per the finance ministry’s investment guidelines, the EPFO has the flexibility to allocate between 5% and 15% of its income to equities and related investments.

EPFO

The proposed strategy involves the daily redemption of ETF units, with the return threshold linked to government securities. This marks a departure from the current periodic redemption approach. Additionally, the EPFO aims to benchmark ETF returns against the average five-year returns of the Sensex, in contrast to the previous four-year benchmark. Insiders familiar with the development shared these details with ET.

Once the finance and labor ministries reach a consensus on this matter, the EPFO will submit the final proposal to the finance ministry for approval.

An unnamed official stated that the EPFO’s stance is that the holding-period return of the ETF units slated for redemption should exceed that of the 10-year benchmark government security by over 100 basis points.

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Furthermore, the EPFO suggests that the holding-period returns of the units set for redemption should be calculated based on the average five-year returns of the Sensex, and investors should have the option for daily redemption.

This proposed approach aims to align ETF returns with historical long-term averages, contrasting with the current four-year redemption period. This adjustment is anticipated to deliver improved returns to subscribers. Presently, their redeems units on a periodic basis.

At the time of drafting this article, neither the labor ministry nor the EPFO responded to inquiries.

The EPFO embarked on its ETF investment journey in August 2015 by allocating 5% to ETFs based on the Nifty 50 and BSE Sensex. Subsequently, it increased its limit. As of January 31, the EPFO has invested 10% of its proceeds in ETFs and hopes to reach the maximum permissible limit of 15% if authorized to reinvest redemption proceeds into ETFs.

With an impressive investment corpus of ₹12.53 lakh crore, of which approximately ₹1.25 lakh crore is dedicated to equities and related investments, the organisation continues to strategically evolve to ensure the financial well-being of its members.

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