Soon EPFO will start investment through ETF channels

Written on Monday, August 3, 2015
By Team Bajaj Capital

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It is never too late to do something right and EPFO has definitely chosen the right path. After much speculation over the decision to invest a partial amount in equity, the retirement fund body has finally decided to go for investment in stocks via ETFs. This process will initiate from 6th August with a pilot corpus of Rs. 5,000 crore (aprx) for the current financial year. The body was given a choice to invest up to 15 percent of its funds but presently it has decided to start with only 5 percent investment in equity and related schemes. EPFO has roped in SBI Mutual funds to guide the body with investments in the ETFs and help them apprehend the dynamics of the market.

As a layman a definite thought strikes my mind, is it good for me or not? What if the decision stumbles to the volatility of stock market? And if it performs well, would I get a better rate of interest? First of all, here the risk factor is significantly low as the amount (5 percent) invested is even less than 1 percent of the total corpus EPFO has. According to the data reveled, body has a total corpus of 6.5 lakh crore. 

Now if we talk of returns, 5 percent of investment goes in to equity that means if you are contributing 4000 every month then on your behalf 200 will be invested. The effect of 5 percent in equities is barely anything. But, in the long-term due to the power of compounding even 0.5% additional returns will be significant. So, yes it is a positive step for those who yet have 20-25 years for their retirement. But individuals with 5-10 years left for retirement should not expect something substantial unless the body decides to escalate the investment amount. 

Things to watch for

The current valuation of EPF is based on accrual system. Under this, investments are treated as held to maturity and the interest earned for that year is added as income.

But, as EPF will now put money in stocks, it would have to alter the system and implement NAV based mark to market system. Traditionally, EPFO has been declaring rate of interest at the beginning of financial year but with investments in stocks it would be challenging to declare returns.  

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