Explained: How EPFO invests its funds and credits interest income

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Last week, the Employees Provident Fund Organisation (EPFO) got the finance ministry’s approval for the interest rate recommended by the central board for FY21. However, there is a process to be followed before the interest is credited to subscriber accounts. Moneycontrol explains how the EPFO invests its funds and when subscribers get interest credited to their accounts.

When will EPFO credit FY21 interest to PF accounts?

The interest rate for provident funds for a financial year is recommended by the Central Board of Trustees, after which the labour ministry seeks approval from the finance ministry.

Last week, the finance ministry approved the interest rate of 8.5 percent for 2020-21, almost eight months after the CBT had recommended it. Although the finance ministry’s approval is a formality and a procedural issue, the EPFO cannot credit the interest amount without it.

Now that the approval has come, the labour ministry and the EPFO will notify it in the official gazette, possibly in the next few days. Following this, the interest amount will be credited to the accounts of subscribers over the next two to three weeks, provided KYC details are updated and in order. Last year, KYC mismatches held up interest payments for some subscribers for a few weeks.

The EPFO estimated earnings of a little over Rs 70,000 crore in FY21, including Rs 4,000 crore from equity investments.

What is the CBT?

The CBT is the apex decision-making body of the EPFO, chaired by the Union labour minister. The Union labour secretary is the vice-chairman and the Central Provident Fund Commissioner is the member-secretary.

There are five Central government representatives, including officials from the finance ministry, and 15 state government representatives. There are also 10 employers’ representatives and 10 employees’ representatives in the trust.

Decisions are taken by the CBT after financial proposals are vetted by its investment committee supported by fund managers and auditors.

Where does the EPFO invest its funds?

The EPFO invests 85 percent of its annual accruals in debt and 15 percent in equities. Among debt instruments, it is allowed to invest a minimum of 45 percent and up to 65 percent in government securities and related investments.

Besides, a minimum of 20 percent and as much as 45 percent can be invested in listed debt securities issued by corporate entities, including banks and public financial institutions that have a minimum residual maturity period of three years from the date of investment, Basel III tier-I bonds issued by scheduled commercial banks under RBI guidelines, term deposits, housing and infrastructure bonds.

The fund managers can invest up to 5 percent of the annual accruals in short-term debt and related instruments like commercial paper. Such paper must have a minimum rating of A1+ by at least two credit rating companies registered with the Securities and Exchange Board of India.

In equity, the retirement fund is allowed to invest in mutual funds and SEBI-regulated exchange-traded funds that replicate the BSE Sensex index or the National Stock Exchange’s Nifty 50 Index. ETFs constructed specifically for disinvestment of shareholding of the government of India including Bharat 22 ETF are part of this.

Among other equity and related instruments, they are allowed to invest directly in listed shares of companies with a market capitalisation of not less than Rs 5,000 crore as on the date of investment and units of infrastructure investment trusts and real estate investment trusts regulated by SEBI.

In equities, currently, the investment is focused on ETFs mimicking the Nifty 50 and Sensex 30 indices and ETFs that aid the government’s disinvestment plan.

Who are the fund managers?

The CBT appointed two portfolio managers – SBI Funds Management and UTI Asset Management Company – starting in November 2020. UTI AMC managed the entire corpus for October 2020.

In 2015, the CBT approved the appointment of five fund managers – ICICI Securities Primary Dealership, Reliance Capital Asset Management, HSBC Asset Management (India), UTI AMC and State Bank of India. SBI ended portfolio management services with effect from March 31, 2019.

What was the interest rate paid in the past few years?

The EPFO currently has about 60 million active subscribers and manages funds in excess of Rs 15 lakh crore. The interest rate for PF accounts was 8.5 percent in 2019-20, 8.65 percent in 2018-19 and 8.55 percent in 2017-18.