EPFO expects robust returns from ETFs despite recent market volatility

In 2020-21, the EPFO earned a total of Rs 72,812 crore on investments from both debt and equity.

Given the possibility of higher capital gains from its investments in equity in 2021-22, the Employees’ Provident Fund Organisation (EPFO) would need to redeem a lesser quantum of exchange traded funds (ETFs) units in the year, as compared to last year, sources said.

The EPFO had generated Rs 10,130 crore in March last year by liquidating ETF units purchased in January-June 2017, booking capital gains of Rs 4,073 crore (67.2%). The gains enabled the EPFO to offer relatively higher returns to subscribers last year. Though the current market volatility is seen to impact capital gains from ETF investments, the market rally for most part of the year is seen to ensure that the returns from past ETF investments to be redeemed now will be solid.

While interest income from investment in debt instruments accounts for the bulk of the EPFO’s earnings, capital gains from equity have in recent years been rising, as the retirement fund body has diversified its investment portfolio.

The Central Board of Trustees (CBT), the highest decision-making body of the retirement fund body, is set to deliberate on the rate of interest to be provided to around 6.5 crore EPF subscribers for the current fiscal at meeting on March 11-12 in Guwahati.

For 2020-21, the CBT set the interest rate for EPF at 8.5%, the same as the previous fiscal.

In 2020-21, the EPFO earned a total of Rs 72,812 crore on investments from both debt and equity. The EPFO distributes most of its income to its subscribers as interest for their accumulated corpus in the Employees’ provident fund (EPF), and keeps a small surplus.

For FY21, the EPFO liquidated Rs 6,057 crore worth of ETF units bought between January-June 2017, booking a capital gain of Rs 4,073 crore. The redemption exercise was carried out between March 12 and March 30 last year. The exercise enabled the EPFO to provide a relatively higher return to its subscribers.

The EPFO had redeemed its part of its investment in ETFs in previous two occasions in 2018 and in 2020, booking 37.66% and 53.15% capital gains respectively.

Last year, the CBT had asked the ETF manufacturers — SBI MF and UTI MF — to strictly adhere to certain principles while redeeming ETF units including adopting the FIFO (First in First Out) principle. It also asked the fund houses to redeem the units over a period of 10–12 transaction days as this would help in keeping the impact cost for such transaction minimal.

As on March 2021, the EPFO had Rs 1,37,896 core investment in ETFs of which Rs 32,071 crore was made in 2020-21. At the end of the 2020-21 fiscal, its net investment was Rs 1,22,986 crore. Excluding equity, the EPFO’s total corpus of investment, as on March 2021, was Rs 14.46 lakh crore.

In 2020-21, EPFO had received Rs 2.18 lakh crore as deposits from its subscribers. The amount was around the same of Rs 2.19 lakh crore in 2019-20. Till June this fiscal, the EPFO has received Rs 57,486 crore as contribution from its subscribers and invested 13.42% or Rs 7,715 crore in ETFs.

The CBT in 2015 decided to invest 5% of EPFO’s incremental deposits in ETF of Nifty and Sensex in order to maximise returns. Accordingly, investment in ETF started with effect from August 5, 2015. In September the same year, the board decided that allocation of Nifty based ETF would be 65-85% and the allocation to Sensex-based ETF would be 35-15%. In 2016, the board enhanced the allocation to 10% of the annual investments and in 2017, to 15%. The remaining 85% is invested in debt instruments including in government securities.

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