Only 5% Corpus in the Stock Market
The EPFO is treading in the stock market very cautiously. It took 10 years to take a decision in this regard. The government has given permission to invest 15% of the corpus in the stock market, but EPFO board is going with only 5%. The remaining 95% corpus still invested in debt securities.
The Equity Investment can Increase up to 15%
This financial year, the EPFO is committing only 5% of its incremental corpus to the stock market. But further it can increase the stock market investment up to 15%. The increase in equity investment would depend upon the experience of EPFO. The EPFO is going into the stock market step by step.
Only New Contribution Goes into the Stock Market
EPFO has 8.5 lakh crore in its kitty. But this whole corpus is not the part of EPF investment in the stock market. Rather, EPFO is not touching the existing corpus. The EPFO investment in the stock market is only from the incremental corpus. It means the money accumulated in the current financial year would be considered for stock investment. In a financial year, EPFO gets about 1-1.2 lakh crore. The 5% of this amount would be about 5000-6000 crore. Only this amount would be invested in the share market. The existing 8.5 lakh crore will remain in debt securities.
Equity Investment through the ETF
The EPFO is not picking valuable stocks itself for the retirement fund corpus. Rather, It is relying on the broader market. The investment of EPFO in the stock market would be through the Sensex and Nifty ETF.
Exchange traded funds (ETF) are a type of mutual fund which invests in index stocks. It follows the weightage of stocks in an index. Consequently, the exchange traded fund follows the movement of its benchmark index. The result of an ETF is similar to the indices e. g. Sensex, Nifty, Midcap index.
The EPFO also invest in CPSE (central public sector enterprise) ETFs as and when new fund offers (NFOs) comes in the market. However the government has clarified that it will not invest in the gold ETF.
Prominence to Nifty
The EPFO is relying more on the broader index Nifty. The 75% of earmarked fund goes to the SBI Nifty ETF, while only 25% is allocated for the SBI Sensex ETF. Nifty is 50 stock index, whereas Sensex is a 30 stock index. However, the investment ratio may alter in future.
The Return from the EPF Should Increase
The investment in equity markets has the potential to give the best return in the long term. The Nifty has given 15.6% annualized return since its inception in 1996. If EPFO gets similar return from the Sensex and Nifty ETF, the overall return of EPFO corpus would be higher.
Due to the better return, the EPFO would be able to give better rate on EPF. Currently it is 8.75%. However, you can’t expect a considerable increase as an investment in the equity market is a mere 5%. If we take average return 15%, the EPFO would be able to give a return of 9.06% instead of 8.75%. However, in the short term, it all depends upon market movement.
The Government has Given Permission
The finance ministry has given its permission to invest in the stock market earlier in the year. In the April 2015 the government has released the notification. In this notification government has given an investment pattern for investment of EPFO corpus.
- 45-50%- Government securities
- 35-45% Debt securities and term deposits of banks
- 5-15% equity market.
- Up to 5% Money market
- Up to 5% Asset backed securities
The labour unions and labour ministry were reluctant for equity investment. But finance ministry was insisting. The greater return of National Pension Scheme also made the background for equity investment by the EPF. The retirement scheme NPS invests some percentage in the share market.
SBI Mutual Fund Manages the Fund
The EPFO has selected the SBI mutual fund as the fund manager to invest in the stock market. Indeed the EPFO is investing in the ETFs of SBI mutual fund. These ETFs are the SBI Nifty ETF and SBI Sensex ETF. The EPFO chose SBI to manage its corpus because it is charging mere 5 paise for investment of Rs 100. It means EPFO is spending Rs 2.5 Crore as the charges of fund management.
It Gives Stability to Stock Market
The investment of EPFO in the stock market helps the equity market. It gives greater stability to the share market. It adds liquidity to the share market. It also reduces dependency on FIIs.
Similar to LIC the EPF corpus would also counter balance the selling of the FII. The FIIs act according to the global markets. But domestic investor, takes decision on domestic market condition. Therefore, the domestic investors turn net buyers at the time of FII selling. This behavior helps to stabilize the share market.
Along with LIC, and domestic mutual fund companies, the EPFO can counterbalance the FII investment.
The EPFO Equity Investment Is Smaller Than LIC
Considering the size of EPFO corpus the investment in share market is minuscule. The 5000 crore of EPFO would be far less than 60000-7000 crore of LIC. LIC, also the government entity invests a considerable amount in the stock market. It is a major shareholder of many blue-chip companies.
The investment in share market is a welcome step. Finally, EPFO could understand that pension fund should be invested in the share market. In the long term the share market gives the best return. Globally, also the pension funds are the major investor in the share market. If our EPFO has invested 10% of its corpus since last 10 years, It would have given 1% more return on EPF.
The interest rates are on the slide. In this circumstance, the equity investment can only give you higher returns.
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