NEW DELHI: Five years have passed since the Employee Provident Fund Organization (EPFO) turned to investing in stocks, but it has yet to come up with a way to assign units of Exchange Traded Funds (ETFs) to its underwriters.
EPFO has been investing in the stock market since August 2015 through ETFs, but it is unclear how to credit the earnings to underwriters during a partial or full withdrawal.
There have been talks, since 2017, about how EPFO underwriters will have ETF units and the non-equity component of their retirement corpus in their account, but this has yet to happen.
“The ETF unit allocation plan will offer freedom to withdraw the non-equity component and keep the ETF units in your account even after retirement or in the case of early retirement,” said a government official who requested anonymity.
“The initial plan was that if a subscriber wanted to withdraw capital and cash components, they would have to mention this in the withdrawal request. But a final decision has not been made yet, “the official said.
The official said that the subscribers’ accounts were supposed to have two components: one for debt investments and the fixed return it secures, and the second, ETF units with the option to withdraw or hold it during the partial or full liquidation of claims. “It is still a work in progress,” the official added.
The last time EPFO cashed in on some ETF units was in 2017-18 when it redeemed ₹2,686 crore. In 2019-20, EPFO invested almost ₹31 billion rupees on the stock market. Each year, EPFO invests 15% of its accruals in equity and the remainder in debt investments.
“You cannot ignore equity as an asset class. But it is very important how you do it and if you mark it to market in terms of accounting and returns. It may be that EPFO can offer options like NPS to those who want to invest more in the capital asset and a basic default threshold for everyone else, ” said Amit Gopal, Business Leader for India Investments at Mercer.
Contrary to promises, five years of investing through ETFs has produced negative returns from EPFO, with implications for paying subscribers.
While the overall cumulative return is almost -8.3% as of March 31 for its ₹1.03 trillion equity investments, its return on investments in government-backed Central Public Sector Enterprise ETFs (CPSE) 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 at the EPFO board meeting on Wednesday.
Furthermore, EPFO’s equity investments through ETFs suffer from limited diversification and there is no option to 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 centrality of the Nifty 50 must change. Maybe they should base it on a broad base and look at the Nifty 100 and Nifty 500 indices for diversification and a fair representation of the economy, “said Shyam Sekhar, financial planner and founder of ithought, a financial advisory and consulting firm.
“CPSE ETF or Bharat 22 ETF may not be good vehicles for a pension fund because of the way it is managed. There is a structural problem with them… and not enough thought was given to create value for their shareholders while achieving some divestment goals, “added Sekhar.
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