The Employees’ Provident Fund Organisation (EPFO) will consider mandating a 10% return threshold for booking profit in its equity investments via exchange-traded funds (ETFs). It will also redeem ETFs frequently based on this threshold instead of a one-go sale to avoid market fluctuations.
The retirement fund body, which has been investing up to 15% of its corpus in ETFs since 2015-16, will also try to lengthen the investment tenure to five years instead of the current four years to ensure better returns.
The Finance Investment and Audit Committee of the EPFO has proposed the 10% threshold, which means the retirement fund body will only redeem ETFs if the annualised returns are 10% or higher.
Once approved by the central board of trustees (CBT) of the retirement body, the threshold would be finalised, a member of the EPFO board told ET.
According to a senior government official, the redemption policy will bring in transparency to the system as well as redemptions.
“The policy proposes to average out the spikes and downs of the market and to sell the ETF on a daily basis for better returns rather than selling them at one go, which is prone to speculations and other evils of the trade market,” the official said.
The proposed policy also states that the EPFO should strive to extend the redemption to five years for better performance. The CBT approved the redemption policy in October last year.
At present, the EPFO offloads equity on the ‘first in, first out’ principle, which means the investments made in equity in the first year are offloaded in the fourth year so that the money remains invested for a longer duration and fetches better returns.
The labour ministry has maintained that investment in equities is needed to provide a better rate of interest to the members of EPFO, as returns on debt and other instruments have been falling.
It has credited 8.1% interest for 2021-22 while the interest rate for 2022-23 is expected to be finalised in February.
EPFO started investing in equities in 2015-16, beginning with 5% of the flows in the first year, 10% in the second year, and 15% in the subsequent years. It has made a cumulative investment of ₹1.7 lakh crore, out of which over ₹22,000 crore have been redeemed till March 31, 2022.