EPFO in talks with Fin Min to reinvest ETF funds in equities to maximise returns

As of January 31, the retirement fund body invested 10 percent of its proceeds in ETFs.

The Employees Provident Fund Orgnisation (EPFO) has begun talks with the finance ministry on the possibility of reinvesting all the redemption proceeds from exchange-traded funds (ETFs) back into the stock market. It also suggested strategies to optimise equity returns while protecting gains from market volatility, a newspaper report has said.

The move comes after the apex decision-making body of the EPFO, Central Board Trustees (CBT), at its meeting in the last week of March gave the green light to the retirement fund body to reinvest its redemption proceeds from its investments in ETFs, the Economic Times reported.

Moneycontrol couldn't verify the report independently.

The proposal to reinvest the redemption proceeds from ETFs into the stock market, which would increase the flow of retirement funds into equities, requires approval from the finance ministry. At present, in line with the finance ministry's investment norms, the EPFO can allocate 5-15 percent of its income in equities and related investments.

Also Read: EPFO adds 17.89 lakh net members in June

More importantly, the EPFO is seeking a host of other changes to the ETF investment guidelines, the report said.

The EPFO has put forward a proposal to change its ETF investment strategy in several ways. One major change is to allow for the daily redemption of ETF units, as opposed to periodic redemptions, and linking the return threshold to government securities, people with direct knowledge of the matter told the financial daily. The ETF returns are benchmarked against the average four-year returns of the Sensex, but they are proposing to extend this period to five years.

“EPFO has also proposed that the holding period returns of the units to be redeemed should be calculated on the basis of the average five-year returns of the Sensex and they must be allowed redemption on a daily basis,” the daily quoted an official who refused to be identified as saying.

Once the finance and labour ministries come to an agreement on the proposed changes to the ETF investment guidelines, the retirement fund body will then submit the final proposal for approval to the finance ministry, the report mentioned.

Also Read: Applying for higher EPFO pension? Key factors you must consider

In August 2015, the EPFO started investing 5 percent in ETFs based on the Nifty 50 and BSE Sensex and subsequentially increased this allocation limit.

As of January 31, the retirement fund body has invested 10 percent of its proceeds in ETFs. However, it aims to reach the maximum permissible limit of 15 percent soon if the government permits the reinvestment of redemption proceeds back into ETFs. At present, the EPFO manages an investment corpus of Rs 12.53 lakh crore, with approximately Rs 1.25 lakh crore invested in equities and related instruments.