Mumbai: In a big boost to equity markets, fund-flush Employees Provident Fund Organisation Thursday entered Dalal Street through exchange-traded fund route with an initial corpus of Rs 5,000 crore, which could go up to nearly Rs 15,000 crore next year.
The first investment, announced here by Labour Minister Bandaru Dattatreya in the presence of top market participants, would be made through SBI Mutual Fund's two index-linked ETFs -- one to the BSE's Sensex and the other to NSE's Nifty.
Dattatreya said EPFO subscribers would get more than the 8.75 percent return they get now by way of annual interest of their money and this would increase as the Fund increases its play in the market.
Significantly, the minister ruled out the possibility of the Fund entering the capital markets through other ETFs or investing in equities, understanding well the stiff opposition from labour unions.
"As of now there is no plan to invest in any other ETF other than the equity ETF," Dattatreya said.
"The Finance Ministry has allowed us to invest up to 15 percent of incremental flow of the EPFO money into equities, from the present 5 percent now of the Rs 1 trillion of investible money the Fund has.
"The present 5 percent cap was taken after the consultants recommended to initially keep the EPFO investments in equities at level," Dattatreya said.
He was, however, soon to add that "even though the EPFO, with its Rs 6.6 trillion corpus will be investing only 5 percent of its incremental flow by the end of the current fiscal, we will review the situation after that to decide whether we should increase it to 15 percent next year".
It can be noted that for decades, the Finance Ministry had been pushing the Labour Ministry, that administers the EPFO, to enter the market. But nothing could be materialised due to strong opposition from the labour unions.
With increasing its investment limit to 15 percent, the EPFO could become the second largest domestic institutional investor in capital markets after market giant LIC, which has invested over Rs 2 lakh crore in the market.
Last year LIC netted a smart gain of 15 percent from the market at Rs 24,373 crore. The Corporation on an average puts in around Rs 50,000 crore into equities every year.
On the return from equity investments to subscribers Dattatreya said, "We expect that the return to the 4.67 crore subscribers of the EPFO will be definitely higher than the existing return of 8.75 percent in the long-term".
EPFO invests Rs 1 lakh crore of its over Rs 6.6 lakh crore of assets into various government securities and the initial understanding is to invest 5 percent of this in equity ETFs, which works out to be around Rs 5,000 crore.
"As it is for the first time that we are investing into equities, we've adopted a cautious approach," Dattatreya said.
Central Provident Fund Commissioner K K Jalan said, "In a presentation to the minister, it was made clear that investment into the long-term equity was much better than long-term investment into debts and hence the decision."
Apart from Dattatreya, the event was attended by SEBI's whole-time member S Raman, SBI chairperson Arundhati Bhattacharya, BSE chief Ashish Kumar Chauhan and K K Jalan.
Chauhan said investment of pension funds in stock markets is an internationally accepted practice and citizens world over have got better returns from such investments.
NSE chief Chitra Ramkrishna, who was not present at the event, in a statement said the EPFO entry will unlock savings into nation building and other entities may consider similar initiatives.
The Index-based ETFs are universally considered amongst the safest investment avenues to help PF members accumulate robust retirement corpus over a long-term.
On the investment pattern, Jalan said, "while 75 percent of the incremental fund will be invested in NSE ETF, the remaining will be made in the BSE ETF. We may also look at investing in the CPSE ETF, whenever it happens."
He also hinted that investment in equities may go up to Rs 7,000-8,000 crore in case some of other organisations like ONGC, whose fund is also managed by the EPFO, decide to invest into equities.
Later, financial adviser of EPFO Sanjay Kumar told PTI that, "SBI MF has reduced its fund management charges for EPFO's investment into equities to 7 bps which includes 2 bps for education as levied by SEBI, thus effective fund management charge in our case will be at 5 bps."
SBI MF managing director and chief executive Dinesh Khara said, "it is a very good substitute when compared to FII. Long-term retirement money coming to equity market will bring stability to the market in the long term."
