EPFO’s poor returns from equities: Blame it on the choice of ETFs

EPFO’s decision to invest in equities was the right one. But its decision to include CPSE ETF and Bharat-22 ETF hasn’t worked well

January 22, 2021 / 06:04 PM IST

Last year, the Employees’ Provident Funds Organisation (EPFO) caused anxiety to its over six crore subscribers when it delayed the 8.5 percent interest payment declared earlier in the year. After dillydallying about how it would meet its committed interest payout and the number of instalments, it finally started crediting members’ EPFO accounts on December 31, 2020 and said that it will happen at one go. It sold ETF holdings worth Rs 3,000 crore to meet the 8.5 percent commitment.

The EPFO’s decision to invest in equities has been widely regarded by market experts as the right way of diversifying its investments. But the choice of funds has been a question mark.

EPFO finds it tough to navigate equity

Effective July 2015, the Employees’ Provident Funds Organisation started to invest a part of its corpus in equities. Initially, it decided to invest 5 percent of its incremental inflows (fresh inflows) in three exchange-traded funds (ETF); SBI – ETF Nifty 50, UTI NIFTY ETF and UTI SENSEX ETF. Eventually, it put more money in equities; first 10 percent and then eventually 15 percent by 2017.

Also read: The nuts and bolts of EPFO


Simultaneously, the EPFO also decided to invest in two other ETFs that were constructed to help the central government divest its holdings in state-owned companies – CPSE ETF (Central Public Sector Enterprises) and Bharat 22 ETF.

The decision to invest in CPSE ETF and Bharat 22 ETF haven’t worked well so far. Over the past 3-year period, both schemes lost money SBI ETF Nifty 50 has done better. Unfortunately, last year’s tide wasn’t able to lift the two disinvestment ETFs. In 2020, Bharat 22 and CPSE ETFs lost 8 percent and 14 percent, respectively. The Nifty 50 index was up 15 percent.

As per market estimates, EPFO has invested close to Rs 2,000 crore in Bharat 22 ETF and nearly Rs 5,000 crore in CPSE ETF. Moneycontrol couldn’t independently verify the exact amounts as they are not in public domain. EPFO’s overall corpus as on November 30, 2020 was Rs 10 trillion. Its investments in ETFs were Rs 1.03 trillion, as on March 31, 2020.

The logic behind going for equities

All market experts that Moneycontrol spoke to said that the EPFO’s decision to invest in equities is correct. Over the years, the EPFO has made money by investing in government securities. But Mukul Ashar, specialist in pension and provident fund reforms says that this is hazardous. “Over the years, the EPFO will not make decent returns by just investing in government bonds and holding them to maturity. In any provident fund, the main income comes from capital appreciation realized through trading of assets, not interest income or from contribution, and by lowering administrative costs. In addition to these steps, investments in equity funds competently done are necessary to diversify portfolio, lower overall risk, and enable EPFO to make reasonable market-linked returns.”

Also read: How the EPFO can improve as India’s largest social security provider

Swapnil Pawar, Founder ASQI Advisors, says: “Globally, provident funds and pension fund trusts invest in equities. And given the long time horizon of EPFO subscriber of at least 10-15 years, this is logical. Long-term returns from debt instruments aren’t enough to grow the corpus meaningfully.” Swapnil, in fact believes that a 15 percent allocation is too low for young investors. But in the absence of asset allocation options for various age buckets, a one-size-fits-all approach of 15 percent equity allocation is fine, he says.

Disinvestment ETFs fail to deliver

To avoid fund manager risk, the EPFO has stuck to ETFs so far. Apart from the three broad-based index ETFs, it also invested in the two disinvestment ETFs – CPSE ETF and Bharat-22 ETFs. This, market experts say, has been disastrous as financial planners do not recommend these ETFs to their customers. These indices contain public-sector firms, except three out of 22 companies within the Bharat-22 index.

The stocks of public sector firms haven’t done well for many years now. “Most of the stocks of CPSE ETF such as ONGC, Coal India, NTPC, and so on have given poor or even negative returns. Sure, Bharat 22 ETF also invests heavily in some of the blue-chips stocks such as Axis Bank, Larsen & Toubro and ITC. Investing in these companies along with most of the underperforming state-owned firms would pull down the overall returns. That apart, there is also concentration risk in these ETFs,” says Rishabh Parakh, a chartered accountant and founder of Money Plant Consultancy.

“PSU as a theme has clearly not worked. Besides getting the EPFO to invest in disinvestment ETFs is akin to mobilizing funds. As such it could be difficult for the government to raise funds to sell its equity stakes in these companies and that is perhaps why EPFO was made to buy CPSE and Bharat-22 ETF units,” says Kirtan Shah, chief financial planner at SRE.

In fact, EPFO’s closest rival, the National Pension Scheme (NPS), regulated by the Pension Fund Regulatory Authority of India (PFRDA), have delivered higher returns over time (13-15 percent returns over the past five-year period, as per Value Research).

Also read | NPS versus EPF: Which is the better retirement investment?

The future of EPFO

At present, the fund managers of EPFO (for its equity and debt investments) are overseen by the central board of trustees, EPF, which consists of as many as 43 trustees. Mukul says that the time has come for EPFO to get more professional, drawing a parallel with how NPS is run by professional fund managers, chosen by a stringent bidding process.

EPFO board would have to do away with the practice of announcing a rate of return, according to market experts. “Neither is EPF an assured-return product, nor should it be perceived as a welfare fund that guarantees returns. EPFO must become professional,” says Mukul.
Kayezad E Adajania
first published: Jan 21, 2021 05:15 pm

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