Forbes India 15th Anniversary Special

EPFO to invest Rs 5,000 crore in stocks this fiscal

Pension fund will invest through two SBI MF exchange traded funds

Published: Aug 6, 2015 05:00:47 PM IST
Updated: Aug 6, 2015 08:11:15 PM IST
EPFO to invest Rs 5,000 crore in stocks this fiscal
Mr.Dinesh Kumar Khara, MD & CEO, SBI MF & NSE officials present investment certificate of EPFO corpus being invested in SBI ETF NIFTY to Bandaru Dattatreya, minister of state for labour & employment. Part of the corpus will also be invested in SBI SENSEX ETF

For the first time since its inception in 1951, the Employees’ Provident Fund Organisation (EPFO) has decided to invest a part of its funds in equities through the Exchange Traded Fund (ETF) route. The fund, which has a corpus of Rs 8.5 lakh crore, will invest Rs 5,000 crore in the equity market in the current fiscal.

Five percent of the incremental funds that the EPFO garners every year will be invested into equity markets through the SBI-ETF Nifty and SBI-Sensex ETF, which will be managed by SBI Mutual Fund. The Nifty ETF is expected to get 75 percent of the funds while the rest will go to the Sensex ETF. But EPFO officials clarified that these are just thumb rules and if the government comes out with a disinvestment plan by floating a CPSE ETF then the EPFO might consider that option as well.

“EPFO has provided social security to many pensioners. By investing a small amount in equities, we are taking the right step towards giving better returns to these people,” said Bandaru Dattatreya, minister of state for labour & employment.

Traditionally, EPFs have invested in debt instruments, which are considered to be safe assets. But over the years, many studies have shown that equities give higher returns over the longer term. For the last ten years, the Sensex has given a return of 11.65 percent annually, compared with the EPF which has returned 8.75 percent annually. 

The idea of EPFO taking the equity route is itself a new beginning and over a period of time the 5 percent it plans to invest in the current fiscal can even increase to 15 percent, depending on the overall experience. But the EPFO management wants to go slow. “We want to begin at 5 percent and then maybe take it to 15 percent. But we would like to take our time,” said KK Jalan, central provident fund commissioner.

While the EPFO has a grand vision to maximise returns, by investing a small part of their funds in the equity market, there is no clear strategy about how this investment will go into the market. As of now, the management is not sure if it wants to take the Systematic Investment Plan (SIP) route. There may be a chance that if the market is trading at very high valuations, then the EPFO might completely avoid investing in the market in that year.

“Ideally there should be a regular SIP plan for investing into the equity markets. This will bring in discipline. Market timing or any other way of investing may not work in terms of maximising returns and minimising risks. But this is a great beginning,” said Vikaas M Sachdeva, CEO, Edelweiss Mutual Fund.