scorecardresearchThis is how your EPF contributions are invested

This is how your EPF contributions are invested

Updated: 23 Sep 2022, 12:22 PM IST

Your EPF contributions are mostly parked in debt, though there is a proposal to park more money in equities.

EPFO contributions are mostly invested in debt with the remaining being parked in equities.

EPFO contributions are mostly invested in debt with the remaining being parked in equities.

So many of us rely on contributions to the Employees’ Provident Fund Organisation (EPFO) while planning our retirement. No doubt, earnings from EPFO are not subject to tax and assume no risk on the investments made. 

However, few of us know that the EPFO invests our money in various instruments to pay interest to its subscribers. Right now, EPFO is offering an 8.1 per cent interest on the investments made. However, few know where the money is invested and in what ratio.

The common myth is that EPFO is a complete debt option, but is it so? A closer look reveals how some of your money gets parked in equities too. As per the investment patterns recently notified by the Ministry of Labour & Employment, nearly 85 per cent of the money is in debt instruments with the remaining being parked in exchange-traded funds (ETFs).

Again, the ETF investments include those in the Nifty50, Sensex, Central Public Sector Enterprises (CPSEs) and Bharat 22 Indices. Recent discussions in the Parliament concerning the ETF investments include:

Financial Year

ETF investments in debt

(in Rs)

ETF investments in equity

(in Rs)

FY 2022-23 till June 202212,199.26 cores84,477.67 crores
2021-2243,568.02 crores2,89,930.79 crores
2020-2132,070.84 crores2,18,533.89 crores
2019-2031,501.09 crores2,20,236.47 crores

Questions were raised about the possibility of increased investments in equities. Though there are no numbers or figures to suggest increased participation in the markets, the concerned spokesperson shared, “The investment is made through portfolio managers and ETF manufacturers appointed by CBT, EPFO for such purpose. The Financial Consultant of EPFO and the External Concurrent Auditor monitor all the investments made by the portfolio managers and ETF manufacturers to confirm that they are in accordance with the pattern of investment notified by the Government and the investment guidelines approved by the CBT, EPFO from time to time.”

What does the 25 percent limit imply?

Recent news suggests that the EPFO plans to up its investments in equities from 15 per cent to 25 per cent. One may attribute this sudden decision to move a notch higher toward equities to the lower interest rate being now offered. Given the low returns offered by debt instruments, the government is struggling to pay interest to its subscribers. 

To bridge the shortfall, the EPFO is now contemplating raising the equity investment limit to 25 per cent. However, there is no information on whether the EPFO would invest in the markets directly or through mutual funds.

Assuming that the government would assent to the EPFO’s proposal of investing more in equities, it would be a big boost to the stock market. Would more people subscribing to the EPF every year, you can expect thousands of crores of rupees to be pumped into the stock market each year. This would add to the DII investments, thus, offsetting the impact of FII investments during a sudden market crash.

We explain the difference between mutual fund, ETFs and stocks.
First Published: 23 Sep 2022, 12:22 PM IST