What EPFO's Rs 67,000-Crore Gain On ETF Portfolio Means For Employees

Here's what to make of capital gains on the ETF portfolio of EPFO.

<div class="paragraphs"><p>(Photo:&nbsp;Praveen kumar Mathivanan on Unsplash)</p></div>
(Photo: Praveen kumar Mathivanan on Unsplash)

Salaried employees contribute to the Employees Provident Fund but they usually look at the scheme only when the return for a year is announced. A closer look at the manner in which the funds are managed by Employees Provident Fund Organisation or EPFO can shed more light on the financial position and the returns that are likely to be earned down the road.

One aspect of the entire investment is the amount that the EPFO is investing in equities. The current rule is that up to 15% of the incremental funds that come into the corpus of the EPFO are invested in equities. Even within equities in order to ensure that there is no fund manager bias, exchange-traded funds of the Sensex and the Nifty have been approved for investment. On the whole, the investment of the equity portion goes into the Index stocks that represent blue-chip companies of the country.

Recent figures that have emerged from data released in parliament regarding the performance of the equity ETF portfolio shows that against an investment of Rs 1.59 lakh crore, the value of this is now around Rs 2.27 lakh crore, giving a capital appreciation of around Rs 67,000 crore. It is important to know what this means and its implication for an employee's investment.

The Gains Are Not Permanent

The gain that might be seen on a particular day on the equity portfolio is not the final gain on the investment because the value of equities is changing every day. This means that the gains can also change depending on the market situation. The gains are permanent only when the investment is sold and the profit is booked. So this is an ever-changing figure and, hence, one has to look at the gains with an element of caution. Improvement in the market, especially the leading indices, means that the gains will increase and a fall will reduce the gains.

Impacts Returns

Most of the investment of the EPFO is in debt. Till August 2015, there was no equity exposure and even now with the gains counted the total equity exposure in ETFs is around Rs 2.27 lakh crore. This is just a small percentage of the total EPFO corpus, so the overall returns that are earned by the fund are still determined by the debt holdings. For example in 2021-22, of the new investment of Rs 2.9 lakh crore by the EPFO only Rs 0.43 lakh crore went towards equity ETF with the remaining going in debt. This is where the trouble is because the yield on the debt instruments has been falling over a number of years and this is why the returns on the fund also dropped to 8.1% in 2021-22. The equity portion needs to be looked at carefully because it can give a boost to the overall returns providing scope for higher overall earnings.

Higher Exposure

The final point is that the total exposure needs to increase towards equity ETF for this to have a meaningful impact on the final returns. The returns from equity are volatile but over a longer time frame, they will be able to beat the returns of debt. For the moment, the figure of capital gains on the ETF portfolio might look high on an absolute basis but in the overall context of the EPF corpus, its impact it is not very significant.

(The writer is founder, Moneyeduschool)