In a move that could see additional investments of over Rs 6,000 crore flowing into the stock markets, the labour ministry has notified the new investment pattern for the Employees’ Provident Fund Organisation that allows it to invest up to five per cent of its incremental income into exchange traded funds.
The move is significant given that the EPFO with a corpus of over Rs 6.5 lakh crore has been traditionally risk averse, choosing to invest in safe options such as state and Central government securities and corporate bonds. The EPFO’s incremental deposits for 2014-15 are estimated at about Rs 80,000 crore, which would further increase this fiscal on the back of the higher wage ceiling for PF contributions.
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“We will invest 5 per cent of the investable funds of EPFO into the ETF. The new investment pattern has been notified,” labour secretary Shankar Aggarwal said, adding that the EPFO will start by investing one per cent of its incremental income in ETFs and take it up to five per cent by the end of the fiscal. While noting that it is not the same as the investment pattern notified by the finance ministry that has called for investing five per cent to 15 per cent of the corpus in equities, Aggarwal said, “We are being a little cautious as we are entering the equity market for the first time and do not want to risk the hard earned money of workers.”
The flexibility for equity investments would be higher for exempt PF trusts who can invest anywhere between five to 15 per cent of their funds in equity and equity-related instruments.
While trade union leaders have fiercely opposed such a plan, employer representatives as well as the Finance and Investment and Audit Committee of the EPFO had advocated investing a small part of its funds in equities in order to get better returns, pointing out that it is an option followed by retirement funds world over.