5 years after entering stock market, EPFO still unclear how to credit ETF units to subscribers2 min read . Updated: 07 Sep 2020, 04:56 PM IST
- The last time EPFO encashed some ETF units was in 2017-18 when it redeemed ₹2,686 crore. In 2019-20, EPFO invested nearly ₹31,000 crore in the equity market. Every year, it invests 15% of accruals in equity and rest in debt investments
NEW DELHI: It has been five years since the Employees Provident Fund Organization (EPFO) took to investing in equities but it is yet to devise a way to allocate units of Exchange Traded Funds (ETFs) to its subscribers.
EPFO has been investing in the stock market since August 2015 via ETFs but it remains unclear about crediting gains to subscribers during a partial or full withdrawal.
There have been talks, since 2017, on how EPFO subscribers will have ETF units and the non-equity component of their retirement corpus in their account, but this is yet to happen.
“The ETF unit allocation plan shall offer freedom to withdraw the non-equity component and keep the ETF units in their account even after retirement or in the case of early withdrawal," said a government official requesting anonymity.
“The initial plan was if a subscriber wishes to withdraw both equity and cash components, he or she will have to mention this in the withdrawal application. But a final decision is yet to be taken," said the official.
The official said subscribers' accounts were supposed to have two components – one for the debt investments and the fixed return it assures, and the second the ETF units with an option to withdraw or keep it during partial or full claim settlements. “It’s still a work in progress," the official added.
The last time EPFO encashed some ETF units was in 2017-18 when it redeemed ₹2,686 crore. In 2019-20, EPFO invested nearly ₹31,000 crore in the equity market. Every year, EPFO invests 15% of its accruals in equity and rest in debt investments.
“You cannot ignore equity as an asset class. But it’s very important how you do it and whether you mark it to market in terms of accounting and returns. May be EPFO can give options like NPS to those who wish to invest more in the equity asset and a basic default threshold for all others,’ said Amit Gopal, India business leader-investments at Mercer.
Belying promises, five years of investments via ETFs have yielded the EPFO negative returns, with implications for subscriber payout.
While the overall cumulative return is almost -8.3% as of 31 March for its ₹1.03 trillion equity investments, its return on investments in government-backed Central Public Sector Enterprises (CPSE) ETF has been -24.36%.
Similarly, in the government-backed Bharat 22 ETF, EPFO’s return on investments is -19.73%, according to official documents reviewed by Mint. The issue is likely to be discussed in EPFO’s board meeting on Wednesday.
Besides, the EPFO’s equity investments via ETFs suffers from limited diversification and there is no option increase or decrease equity exposure unlike that offered by the National Pension System (NPS). This has resulted in low or negative returns for this asset class.
“ETF as a concept is not bad for a pension fund like EPFO. But this Nifty 50 centricity needs to change. May be, they should broad-base it and look at Nifty 100 and Nifty 500 indices for diversification, and a fair representation of the economy," said Shyam Sekhar, a financial planner and founder ithought, a financial consulting and advisory firm.
“CPSE ETF or Bharat 22 ETF may not be good vehicles for a pension fund for the way it is managed. There is structural problem in them…and it was not thought through enough to create value for its shareholders while achieving some disinvestment targets," added Sekhar.