EPFO mulls reinvesting 50% of ETF redemption proceeds in equity market

In a bid to enhance its equity exposure and earn higher returns for its nearly 65 million subscribers, the Employees' Provident Fund Organisation (EPFO) is considering reinvesting 50 per cent of its exchange-traded funds (ETFs) redemption proceeds back into equity.

Sources close to the development said a proposal regarding this was discussed in the investment committee (IC) meeting in October last year, and the recommendation has been sent to the Central Board of Trustees (CBT), the apex decision-making body of the EPFO for its approval.

The next CBT meeting is scheduled to be held on Saturday.

During April-October, FY24 EPFO invested Rs 27,105 crore in ETFs and the total investments of ETFs in the last seven years have crossed Rs 2.5 trillion.

The CBT will also consider another proposal to increase the redemption period for better yields for investments in equities from four years to seven years in the next six years.

Currently, the EPFO redeems ETF units periodically for around four years and the capital gains realised from this exercise is then treated as income and distributed to EPF subscribers as income.

Further, the committee also recommended framing guidelines for investment in the units of Infrastructure Investment Trusts (InvITs) and Real Estate Investment Trusts (REITs) sponsored by public sector undertakings up to 3 per cent of EPFO s total portfolio.

EPFO ETF

The committee discussed and recommended to the CBT that it amend the investment management manual by removing REITs and InvITs from the restricted category and allow investment in such REITs and InvITs which would be sponsored by the units of public sector undertaking (PSU),  sources said.

The investment committee recommended that the entire assets provided by the sponsor for InvIT/REIT should be fully operational assets.

The social security organisation invests in equity through ETFs only and started investing 5 per cent of its investible corpus in it based on the S&P BSE Sensex and National Stock Exchange Nifty50 in August 2015 to earn higher income on its investments.

This limit has been subsequently raised to 15 per cent.

Earlier, Business Standard had reported that buoyed by an increased subscriber base the total amount in the investment corpus of the retirement fund body had grown by 16.7 per cent in 2022-23 (FY23) to stand at Rs 21.3 trillion from Rs 18.3 trillion in 2021-22 (FY22).

Of the total amount, the Employee Provident Fund constitutes Rs 13.04 trillion, followed by the Employee Pension Fund (Rs 7.7 trillion) and the Employees  Deposit-Linked Insurance Scheme (Rs 41,062 crore).

In FY23, EPFO invested most of its corpus in state development loans (38.6 per cent), which are used by state governments to fund their fiscal deficits, followed by investments in central government securities (17.7 per cent), corporate bonds of the public sector enterprises (15.5 per cent), and public accounts with the central government (10.1 per cent).