An inspired EPFO to step up its equity investment strategy

New Delhi: After doubling equity exposure to 10% of its incremental corpus, the Employees’ Provident Fund Organization (EPFO) is now looking to take its equity investment strategy to the next level.

It is planning to invest in blue-chip stocks outside of the Nifty 50 and Sensex 30 stocks, but within the top 100 stocks in terms of market capitalization and in quality mid caps.

With increase in equity exposure, the government believes that EPFO needs to diversify the investment basket, at least two government officials said on condition of anonymity.

“A combination of blue chips and mid caps has the potential to give better returns and expanding the equity basket will be a logical next move,” one of the two officials said. The official, however, said that the investment vehicle will remain the same—exchange-traded funds (ETFs) and not direct stock investments.

An ETF comprises a clutch of stocks that reflect the composition of an index, such as the Nifty or the Sensex, and are traded on stock exchanges like company stocks.

EPFO entered the Indian equities market in August 2015, channelling its investments through two ETFs. The two chosen by the EPFO were SBI-ETF Nifty and SBI Sensex ETF. While 75% of the corpus went to SBI Nifty, the rest was invested in SBI Sensex. Both ETFs mimic the Nifty 50 and Sensex 30 index.

“In the pipeline are alternative ETFs other than Nifty 50 and Sensex 30 in order to optimize return with minimum risk,” said the second official.

“The initial investment outside SBI-ETF Nifty and SBI Sensex ETF may be to the tune of 25% of the incremental corpus,” the second official said, adding that a final decision will be taken “at an appropriate time”. The new equity investment pattern may come into force in a couple of months after the budget session of Parliament. The budget is slated to be presented on 1 February.

To begin with, EPFO may invest in the “top 100 stocks by market capitalization”, said the first official. The official said that an expert group has suggested to the finance and investment committee of EPFO that indices such as Nifty Next 50 and S&P BSE Midcap Select can be considered for increasing EPFO’s equity investments.

“The group recommends that investments can be considered in these indices at the earliest possible. A combination of these four index strategies has the potential to deliver better returns over a longer period with greater diversification,” said the first official.

EPFO invested Rs6,577 crore in 2015-16 and will pump in over Rs13,000 crore in equities in 2016-17 after the labour ministry-controlled retirement fund manager decided to double its equity exposure from 5% of its incremental corpus to 10%.

In 2017-18, EPFO is expected to invest more than Rs13,000 crore in equities as it believes that its active subscriber base will increase gradually, leading to more incremental deposits. By the end of August 2016, when the labour ministry last reported its equity returns, its equity investments had earned 13.24% returns.

Earlier this month, EPFO fixed 8.65% interest rate for its subscribers, down from 8.8% the previous fiscal. Though the rate is the lowest in four years, it’s still better than many other investments, including fixed deposits and public provident fund.

When asked about the possible opposition it may face for investing in potentially more volatile indices, the first official said, “There are fund managers who take care of such decision and they know the market better. You have to be practical about returns than oppose a move emotionally. Once the final decision is taken, we shall explain to the central board trustees of the EPFO.”

EPFO manages a corpus of over Rs8.5 trillion with some 40 million subscribers contributing to the fund every month.

“For long-term returns, diversification is a good idea. Any organization seeking long-term return is now looking at investing for five years or more in the stock market. That may be the reason for EPFO to explore diversification. But they have to keep in mind the annual stability as EPFO declares interest earnings every year,” said Amarpal S. Chadha, partner, human capital services, at consulting and auditing firm EY.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.