EPFO may fix the threshold for ETF returns
Contents News/Article Date: 17th January 2023
Relating to which Act: The Employees Provident Funds & Miscellaneous Provisions Act, 1952
Applicable to which State: All the establishments in the States with PF coverage
Type: Newspaper report – The Finance Investment and Audit Committee of the EPFO has proposed the 10% threshold, which means the retirement fund body will only redeem ETFs if the annualized returns are 10% or higher.
Pertains to: employers and employees
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In the last instance –
“As the name would suggest, it’s an endeavour on the part of EPFO to be more accessible to different stakeholders, including employers… A common platform to facilitate the exchange of ideas and dissemination of information, besides grievance redressal,” it said.
With the new step, EPFO is expected to move away from a pure grievance redressal-centric approach to a broader and more participatory one.
In the current instance – The Employees’ Provident Fund Organisation (EPFO) will consider mandating a 10% return threshold for booking profit in its equity investments via exchange-traded funds (ETFs). It will also redeem ETFs frequently based on this threshold instead of a one-go sale to avoid market fluctuations.
The retirement fund body, which has been investing up to 15% of its corpus in ETFs since 2015-16, will also try to lengthen the investment tenure to five years instead of the current four years to ensure better returns.
Subject: EPFO may fix threshold for ETF returns
For greater details, appended below is the complete news item
EPFO may fix the threshold for ETF returns
The retirement fund body, which has been investing up to 15% of its corpus in ETFs since 2015-16, will also try to lengthen the investment tenure to five years instead of the current four years to ensure better returns.
Source: ETF ET Spotlight
The Employees’ Provident Fund Organisation (EPFO) will consider mandating a 10% return threshold for booking profit in its equity investments via exchange-traded funds (ETFs). It will also redeem ETFs frequently based on this threshold instead of a one-go sale to avoid market fluctuations.
The retirement fund body, which has been investing up to 15% of its corpus in ETFs since 2015-16, will also try to lengthen the investment tenure to five years instead of the current four years to ensure better returns.
The Finance Investment & Audit Committee of the EPFO has proposed the 10% threshold, which means the retirement fund body will only redeem ETFs if the annualized returns are 10% or higher.
Once approved by the central board of trustees (CBT) of the retirement body, the threshold would be finalized, a member of the EPFO board told ET.
According to a senior government official, the redemption policy will bring transparency to the system as well as redemptions.
“The policy proposes to average out the spikes and downs of the market and to sell the ETF on a daily basis for better returns rather than selling them at one go, which is prone to speculations and other evils of the trade market,” the official said.
The proposed policy also states that the EPFO should strive to extend the redemption to five years for better performance. The CBT approved the redemption policy in October last year.
At present, the EPFO offloads equity on the ‘first in, first out’ principle, which means the investments made in equity in the first year are offloaded in the fourth year so that the money remains invested for a longer duration and fetches better returns.
The labour ministry has maintained that investment in equities is needed to provide a better rate of interest to the members of EPFO, as returns on debt and other instruments have been falling.
It has credited 8.1% interest for 2021-22 while the interest rate for 2022-23 is expected to be finalized in February.
EPFO started investing in equities in 2015-16, beginning with 5% of the flows in the first year, 10% in the second year, and 15% in the subsequent years. It has made a cumulative investment of ₹1.7 lakh crore, out of which over ₹22,000 crores have been redeemed till March 31, 2022.
EPFO invests up to 15% of its annual incremental corpus of about ₹1.5 lakh crore into equities through ETFs, both on the Nifty and Sensex platforms.