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EPFO holds talks with Ministry of Finance on reinvesting ETF money

New Delhi, Aug 25, 2023 

EPFO will move the final proposal for the finance ministry's assent once the finance and labour ministries decide on the matter

The Employees' Provident Fund Organisation (EPFO) has initiated discussions with the Ministry of Finance to invest all of its redemption proceeds from exchange-traded funds (ETFs) back into the equity market, according to a report by The Economic Times (ET).

ET quoted sources saying that EPFO has suggested measures to increase returns while protecting gains from market turbulence. In the last week of March, the central board of trustees permitted the EPFO to reinvest its redemption proceeds from its investments in ETFs. The central board of trustees is the EPFO's apex decision-making body.

The Ministry of Finance needs to approve such a measure. According to the ministry's investment guidelines, the social security organisation can invest between 5 per cent and 15 per cent of its income in the stock market and related investments.

EPFO is also seeking other changes to the ETF investment guidelines.

EPFO will move the final proposal for the finance ministry's assent once the finance and labour ministries decide on the matter.

An official told ET that the EPFO believes that the holding-period return of the ETF units that are intended to be redeemed should be higher than that on the 10-year benchmark government security by over 100 basis points. The official added that the retirement fund body has also proposed that the holding-period returns of the units to be redeemed should be calculated based on average five-year returns of the Sensex, and redemption must be permitted daily.

This step would link ETF returns to historical long-term averages against the existing redemption period of four years. At the present moment, EPFO redeems the units periodically.

In August 2015, EPFO started investing 5 per cent in ETFs based on the Nifty 50 and BSE Sensex and, following this, has raised the limit.

What is EPFO?

EPFO is a body that encourages employees to save funds post-retirement. The EPF scheme motivates members to build a corpus fund to avail of monetary security after retirement. The Ministry of Labour and Employment governs the organisation.

The Centre has ratified the rate of interest at 8.15 per cent rate on deposits under the Employees Provident Fund scheme for the financial year 2022-23 (FY23).

What is an exchange traded fund (ETF)?

An exchange traded fund (ETF) is a collection of various securities merged together in a single fund that is traded on the stock exchange. Most ETFs track a benchmark, an index or a basket of assets and try to replicate its performance.

[The Business Standard]

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