EPFO plans to increase equity investment limit to 25%: All you need to know

Last updated:

The government last week approved an 8.1% rate of interest on EPF deposits for 2021-22, which is an over four-decade low. It is going to impact about 60 million subscribers of EPFO. To increase the interest rate for users, EPFO plans to increase equity investment. Let us look at all the details.

What is EPFO?

The Employees’ Provident Fund Organization is a non-constitutional body that promotes employees to save funds for retirement. The organization was created in 1951 and is governed by the Ministry of Labor and Employment and the Government of India. The various schemes under EPFO are:

  • Employees’ Provident Funds Scheme (EPF)
  • Employees’ Pension Scheme (EPS)
  • Employees’ Deposit Linked Insurance Scheme (EDLI)

The employee and the employer must make an EPF contribution. Each makes a 12% contribution of the employees’ dearness allowance and basic salary towards EPF. 

Where is EPF money invested?

  • EPFO does not invest money directly in the stock market.
  • It invests in Exchange Traded Funds (ETFs) based on Nifty 50, Sensex
  • It also invests in Central Public Sector Enterprises (CPSEs) and Bharat 22 Indices. 

New proposal

  • As per reports, EPFO is considering a proposal to increase its investment limit in equities to 25% of incremental flows from the existing 15%. 
  • The equity investment will be increased to 20% in the first phase, and in the second phase, it will increase to 25%.
  • One of the reasons for higher exposure to stocks is to bridge the shortfall in returns with investment in debt securities.
  • Currently, the proposal is being worked upon. The proposal will be taken up in June last week at a meeting of the EPFO Central Board of Trustees (CBT). The recommendation will be sent to the labor ministry and finance ministry for final approval.

The impact of the change

  • EPFO invests about Rs 1,800 to 2,000 crore in exchange-traded funds at its current level of 15%. They use SBI Mutual Fund and the UTI Mutual Fund for investment.
  • They do not invest in actively managed equity mutual fund schemes or directly in stocks.
  • Now EPFO officials are meeting mutual fund managers to assess the possibility of investing in equity schemes.
  • As per data available, the EPFO gets total flows of Rs 600 crore every day on average and uses around Rs 200 crore to settle claims.
  • If the equity investment limit surges to 25%, EPFO could possibly infuse about Rs 3,000 crore into the stock market every month.

Why the change - EPFO returns

EPFO feels that equities will give good returns over the next few years. Also, the investment returns from other categories have not delivered the desired investment returns. Below are the numbers:

  • The EPFO corpus invested by SBI Mutual Fund in ETFs that mimics the Nifty 50 and Sensex 30 indices has given a return of 15.76% as of March 31, 2021.
  • The corpus managed by UTI MF has fetched an even better-annualized return of 16.37%.
  • Exposure to Bharat 22 has fetched the EPFO an annualized return of just 2.1% in the last financial year.
  • Its investment in CPSE ETF gave it a negative return (-1.7%) by the end of the financial year 2021.

From the above numbers, it is clear why EPFO is going with a higher equity investment.