Equity investment limit for EPFO may be raised to 25 per cent

NEW DELHI: A greater proportion of provident fund savings could be headed for the stock market with shares rising to successive records in past weeks, said a government official.

Such a move could more than double the provident fund money invested in exchange-traded funds (ETFs) over time.

The government is considering a plan to raise the equity investment limit for the Employees’ Provident Fund Organisation (EPFO) to 25% from 15%.


The move follows the higher than-expected return on equity while that on debt has been falling, compelling the government to explore wider investment options to maximise returns.

The return on equity exceeds 13.5% while that on debt is 8.5%. That compares with the EPFO payout for FY17 pegged at 8.65%.

The move could lift EPFO’s annual equity allocation to as much as Rs 50,000 crore over time, if the proposal is accepted.

“Across the world, equity is a preferred class of investment for pension funds,” the official said, adding that the formula is still being worked out. “These funds invest 30-40% in equity, as it gives them inflation-indexed returns. Besides, our investments so far have fetched us over 13% return, making it very attractive for our subscribers.”

The finance ministry traditionally notifies the pattern of investment for non-government provident funds, superannuation funds and gratuity funds.

In the EPFO’s case, this has to be approved by its Central Board of Trustees before being implemented. The current investment rules have been in force since April 2015 when for the first time the government mandated 5-15% investment in equity and related investments.

The EPFO’s central board subsequently permitted investment in exchange-traded funds (ETFs) based on the Nifty 50 and Sensex indices with the first such investment made in August 2015.

Total investment in equity ETFs was Rs 6,577 crore in FY16. In FY17 it rose to Rs 14,982 crore or 10% of its investible amount.

For the current fiscal, the investment limit was raised to 15%, which has translated into more than Rs 22,000 crore being invested in ETFs run by SBI Mutual Fund, UTI Mutual Fund and one ETF comprising central public sector enterprise stocks.

EPFO’s equity investment has earned an annual return of over 13%, a notional gain until it begins liquidating holdings under its unitisation policy approved by CBT in November last year. This exceeds the 8.5% that its debt investments earn.

As per the unitisation policy, gains on equity investments will be distributed to members in the form of units like mutual funds. Earnings on the debt component will be paid as interest. The EPFO manages a retirement corpus of over Rs 9 trillion.

The unitisation move is seen as benefiting 450 million EPFO subscribers once it’s rolled out.