Expect higher EPFO returns if authorities remove equity-linked investment cap
Premium- EPFO's consideration to raise its investments in equity from 15 per cent to 25 to 30 percent will help to pass on better returns to its 6 crore subscribers
Employees’ Provident Fund Organisation's (EPFO) 6 crore active subscribers are quite upset after the recent reduction in the rate of return to 8.1% in their retirement corpus. In recent years EPFO had to cut down on various risky instruments which were giving higher returns with high risk. That's why the investments were earning better corpus now the authorities are willing to take higher risk by investments in stock market-linked investments.
Reportedly, EPFO's Finance Investment and Audit Committee have held a preliminary discussion to consider raising the cap on equity-linked investments limit from 15 per cent to 25-30 per cent. According to the proposal equity exposure will be raised and investment guidelines will be revised to diversify the portfolio proportionately between equity and debt.
If the equity investment limit rises to 25 per cent, the EPFO may pump ₹3,000 crore in the stock market every month. EPFO's Central Board of Trustees (CBT) have been concerned that an 85:15 proportion with debt and equity fund don't leave managers with many options and a higher rate can't be expected if the equity cap is limited to only 15%. Currently, EPFO invests in equity via exchange traded funds (ETFs) and earned 37.66% and 53.15% capital gains after redeeming its part of its investment in previous two occasions in 2018 and in 2020. In 2020-21, the EPFO earned a total of ₹72,812 crore on investments from both debt and equity.
A higher investment in equity would translate into earning up to 9-10 per cent whereas debt investments would give only 6-7%. CBT is expected to take up the issues at its next meeting that will be held at the end of this month. At present, EPFO has a corpus of about ₹17 trillion with debt investments worth ₹14.46 trillion and equity investments, where exposure is relatively recent, are worth ₹1.23 trillion.
In March 2020, the EPFO had lowered the interest rate on provident fund deposits to a seven-year low of 8.5 per cent for 2019-20, from 8.65 per cent in 2018-19. The EPF interest rate provided for 2019-20 was the lowest since 2012-13, when it was brought down to 8.5 per cent.
The rate of interest was slightly higher at 8.8 per cent in 2015-16. It had given 8.75 per cent rate of interest in 2013-14 as well as 2014-15, higher than the 8.5 per cent for 2012-13. The rate of interest was 8.25 per cent in 2011-12