The Employee Provident Fund or EPFO plans to raise its investment limit in the equity market to 25% of the incremental flows from the existing 15%. It aims to increase its exposure to stocks to bridge the shortfall in returns from its investments in debt securities. There was a meeting by the Finance Investment and Audit Committee to discuss raising the equity investment limit. The EPFO Central Board of Trustees will take up the proposals of the Finance Investment and Audit Committee in the last week of June. The recommendations will be sent for final approval to the Labour and Finance Ministry. So why does EPFO invest in the equity market?
The Investment Committee proposes to raise equity investment in two phases.
The investment committee plans to increase EPFO equity investment to 25% of daily inflows in a couple of phases. According to the plan, the daily inflows into equities will first be increased to 20% and subsequently to 25%.
Top EPFO officials will soon meet leading mutual funds to collect feedback on likely investment avenues in equity mutual fund schemes.
EPFO currently invests in the equity market through Exchange Traded Funds or ETFs that track Sensex and the Nifty. These Exchange Traded Funds are managed by UTI Mutual Fund and SBI Mutual Fund. However, EPFO will not invest directly in actively-managed equity funds and stocks.
Under the current 15% limit, EPFO invests around Rs 1,800 to 2,000 crores in ETFs operated by SBI and UTI mutual funds. The Central Provident Fund Body gets around Rs 600 crore on average each day. Moreover, the Central Provident Fund Body uses around Rs 200 crore out of the flows of Rs 600 crore to settle subscriber claims.
It translates to around Rs 12,000 crore towards different investment schemes. Moreover, if the equity investment limit increased to 25%, EPFO would potentially pump around Rs 3,000 crore into the stock market each month.
EPFO feels that equities will give good returns over the next few years. Moreover, the investment yields of other categories have not delivered the desired investment returns.
Why does EPFO invest in the stock market?
EPFO wants its subscribers to get the maximum returns. As equity has the potential to give inflation-beating returns over the long run, EPFO invests subscribers’ money in the stock market.
However, EPFO doesn’t invest subscribers’ money directly in stocks. It invests in ETFs which are based on the Sensex, Nifty 50, Central Public Sector Enterprises and Bharat 22 Indices.
EPF is an excellent investment for salaried employees to save for retirement. Employees mandatorily contribute 12% of their basic salary and dearness allowance towards the employee’s provident fund. The Central Board of Trustees decides the EPF interest rate. In a nutshell, EPFO invests in the equity market to give good returns to its subscribers through the ETF route.
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