EPFO’s ₹1 trillion ETF return in negative zone

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Belying promises of five years of investments via exchange-traded funds (ETFs) have yielded the Employees Provident Fund Organisation (EPFO) negative returns, with implications for employee payout.

While the overall cumulative return is almost -8.3% as of 31 March for its ₹1.03 trillion equity investments, its return on investments in government-backed Central Public Sector Enterprises (CPSE) ETF has given it a -24.36% return.

Similarly, in the government-backed Bharat 22 ETF, EPFO’s return on investments is //minus// 19.73%. The other two ETFs run by SBI Asset Management Co. and UTI Asset Management Co. have yielded -6.19% and -10.06% for the retirement fund manager, according to official documents reviewed by Mint.

The issue is likely to be discussed in the central board meeting of the EPFO later this week.

EPFO invests 85% of its annual deposits in debt instruments and the remaining 15% in equity invested via ETFs.

Though equity investments have inherent risks, in 2020-21 when debt investments are expected to earn less, its equity returns may not offer a cushion to EPFO, potentially impacting the rate of interest for millions of its subscribers.

The problem also highlights its choice of some ETFs that are yielding very //low// returns — a potential ethical concern for a pension fund that manages statutory retirement savings for millions of low-wage workers.

A board member of EPFO, who declined to be named, said, “Investments to achieve goals of the government have their shortcomings. The retirement fund body needs to realize that there is a difference between educated investors investing by choice, and uninformed workers’ money getting invested by default through avoidable ETFs.”

EPFO’s investment in CPSE and Bharat ETFs as investment vehicles of a pension fund has been in the spotlight as they are seen as thematic investments with stocks of very few state-run companies. They were launched to help the government raise money from the market, and their performance too is often linked to government decisions.

EPFO started investments via ETFs in equity on 5 August 2015 and as of 31 March 2020, its total equity exposure was Rs 1.05 trillion. Of this, it redeemed Rs.2,686 crore in 2018, leaving it with a total exposure of 1.03 trillion.

In March, EPFO had announced an 8.5% payout for 2019-20 financial year, but it is yet to be credited to subscribers as a formal approval from the finance ministry is awaited.

EPFO is looking at a tough 2020-21, with a sizable amount of EPF withdrawals prompted by the pandemic and job losses, said the board member cited above, adding, “We expect the investments to be well thought through.”

“Debt investments like 10-year government bond yields are at least 1.2 percentage points less than a year back, and equity could have helped the body stand on better ground”.

“ETF as a concept and investment vehicle is not bad for a pension fund like EPFO. But this Nifty 50 centricity needs to change. Maybe, they should broad-base it and look at Nifty 100 and Nifty 500 indices for diversification, and a fair representation of the economy,” said Shyam Sekhar, a financial planner and founder ithought, a financial consulting and advisory firm.

“CPSE ETF or Bharat 22 ETF may not be good vehicles for a pension fund for the way it is managed. There is a structural problem in them, and it was not thought through enough to create value for its shareholders while achieving some disinvestment targets,” added Sekhar.

EPFO investments give negative returns