New Delhi: Sitting on a comfortable notional return of 16% from its stock market investments, retirement fund manager Employees’ Provident Fund Organisation (EPFO) is looking to broaden its equity portfolio beyond the Nifty 50 and Sensex 30 stocks.

EPFO and the labour ministry are of the view that to maximize returns, it has to expand its investment portfolio, according to internal documents reviewed by Mint, and two officials familiar with the development.

EPFO feels that equity investments in just two categories of exchange-traded funds (ETFs) run the risk of too much concentration in a small clutch of stocks and lower returns due to lack of diversification.

The central board of EPFO is likely to take a call on its equity diversification on Tuesday.

Though EPFO will continue to invest in stocks via ETFs, it is readying to invest in multi-cap and mid-cap ETFs, a market instrument that is far more volatile, but can provide better risk-adjusted returns over the long term. This, the organization feels, would be rewarding for its 55-million strong subscriber base. A decision is expected to be taken on 26 June.

So far, EPFO has invested 47,431 crore in ETFs and gained a 16.07% notional return. While its investments in ETFs run by the State Bank of India have returned 16.69%, the ETFs run by UTI have yielded 17.01% return as in May-end 2018. However, investments in central public sector enterprise ETFs have earned lower single-digit returns, according to official data.

“The expert group constituted by the FIAC (finance advisory committee of EPFO) to examine alternate strategy for investments in ETFs, in its report, suggested that alternate ETF investments, other than Nifty 50 and Sensex 30, be considered in order to optimize returns with minimum risk. The expert group also suggested… that indices such as Nifty Next 50, BSE Select MidCap and other indices can be considered," said the EPFO internal document on investments.

Subsequently, the matter was referred to rating agency Crisil, which has been a consultant to EPFO on its investment matters. It was also discussed by senior officials of EPFO and the labour ministry. Following a direction from the central board of EPFO, the matter was re-examined by Crisil and a ranking made of three indices other than Nifty 50 and Sensex 30.

All three indices are being considered for diversification, given that the BSE MidCap Select Index, Sensex Next 50 and Nifty Next 50 fare better in the composite weighted score and rank higher than Nifty and Sensex.

“We may accordingly select all three for investment in their ETFs," notes the EPFO documents to be tabled before the central board of EPFO on Tuesday.

According to expert suggestions, though the BSE MidCap Select Index, Sensex Next 50 and Nifty Next 50 index ETFs are more volatile and riskier assets over a one-, three- and five-year period, all three “have delivered higher returns" on a risk-adjusted method over a 10-year period over the ETFs, where EPFO is investing right now.

“EPFO investments are long term and it should not look at three-year time frames for return comparison. We must diversify beyond the current portfolio," said a labour ministry official, requesting anonymity.

The labour ministry will, however, require a go-ahead from the finance ministry if its central board approves the plan. The finance ministry needs to make a minor amendment to the investment pattern followed by EPFO to venture beyond the Nifty 50 and Sensex 30 indices.

“The finance ministry approval will be a problem as it intends to garner better returns for subscribers via portfolio diversification," the official cited above said.

EPFO started investing in stocks from August 2015 with a 5% exposure to equity via ETFs. At present, it invests 15% of its annual accruals in equities.

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