EPFO will invest 5 percent of its incremental corpus in equity market through ETFs.
The Labour Ministry’s move to allow Employee Provident Fund Organisation or EPFO to invest 5% of its incremental corpus in equity market through ETFs is likely to benefit mutual fund industry. Media reports indicate that nearly Rs.7500 crore of retirement savings may be invested through ETFs over a period of one year.
Also, this long term money may be invested in equity ETFs. Such ETFs track the equity indices like S&P Sensex, Nifty 50 etc.
Dinesh Khara, CEO, SBI Mutual Fund is of the view that the move will help mutual fund industry to position itself as a low cost long term investment vehicle.
Earlier, the finance ministry has proposed to allow EPFO to invest 5-15% of its incremental income in ETFs.
Last year, the finance ministry had given a mandate to Goldman Sachs AMC to launch and manage the central public sector enterprise (CPSE) ETF through which it had divested its stakes in 10 PSUs. The government had raised Rs. 3000 crore from this ETF. Currently, the scheme manages assets of Rs.2373 crore and charges an expense ratio of 0.53%. Value Research data shows that the scheme has delivered a return of 21% over a year.
There is much speculation over whether this money would be invested in existing ETFs or dedicated ETFs to be launched specifically for EPFO money. CEO of a private fund house felt that the corpus is likely to be invested in PSU ETFs. Such ETFs are risky as it mimic a specific sector, he added.
However, a few officials have a different view. Khara believes that EPFO corpus may come to the existing schemes. “Industry has a lot of ETFs with a good track record. There is no need to launch additional schemes to manage EPFO’s corpus.”
Typically, the government floats ‘The Request for Proposal’ to appoint a fund house to launch and manage such funds through ETF route. The government considers two parameters - quantitative and qualitative - for the selection of the fund house. While quantitative parameter evaluate the fund houses on the basis of a management fee quoted, the qualitative parameter gauges ability and experience of fund houses to manage ETFs.
