The Employees’ Provident Fund Organisation (EPFO) has begun talks with the finance ministry in order to reinvest its entire redemption proceeds from exchange-traded funds (ETFs) back into the stock market. Sources familiar with the matter have informed that the EPFO is exploring strategies to enhance equity returns while protecting against market volatility. During its late March meeting, the EPFO’s central board of trustees authorized the organization to consider reinvesting the redemption proceeds derived from its ETF investments. However, implementing this initiative requires approval from the finance ministry. Currently, investment guidelines established by the finance ministry permit the EPFO to allocate between 5% and 15% of its income towards equities and related investments.
The EPFO is actively advocating for revisions to the existing ETF investment guidelines. The organization proposes a shift to daily redemption of ETF units, tied to the return benchmark of government securities, as opposed to the current periodic system. Officials familiar with the situation disclose that this proposition also involves benchmarking ETF returns to the average five-year performance of the Sensex, departing from the prevailing four-year comparison.
Upon reaching a consensus between the finance and labour ministries, the EPFO will present the final proposal to the finance ministry for endorsement. An official from the EPFO highlighted the necessity for the holding-period return of the proposed redeemed ETF units to exceed the yield on the 10-year benchmark government security by a margin greater than 100 basis points. The EPFO has also suggested that the holding-period returns of the units to be redeemed should be calculated based on the average five-year returns of the Sensex and allowed redemption on a daily basis.
This adjustment would align ETF returns with historical long-term averages, potentially increasing returns for subscribers. The labour ministry and the EPFO have chosen not to respond to inquiries regarding these developments.
It is worth noting that the EPFO initially invested in ETFs linked to the Nifty 50 and BSE Sensex in August 2015, starting with an allocation of 5% and later raising the limit. As of January 31, it had invested 10% of its proceeds in ETFs, with the goal of reaching the maximum permissible threshold of 15% if authorized to reinvest redemption proceeds into ETFs. The EPFO currently holds an investment corpus of Rs 12.53 lakh crore, with approximately Rs 1.25 lakh crore directed towards equities and related investments.
