EPFO's poor interest rates to employees: Blame it on the choice of ETFs

EPFO's decision to invest in equities was the right one. But its decision to include CPSE ETF and Bharat-22 ETF hasn't worked well

The 8.1 percent interest rate that the Employees' Provident Funds Organisation (EPFO) decided to pay for FY2022 (down from 8.5 percent paid in FY21) is the lowest in 43 years. The EPFO took this decision last Saturday in a continuation of woes for EPFO subscribers.

A year before last, the Employees' Provident Funds Organisation (EPFO) had caused anxiety to its over six crore subscribers when it delayed the 8.5 percent interest payment declared earlier in the year. After dillydallying about how it would meet its committed interest payout and the number of instalments, it finally started crediting members' EPFO accounts on December 31, 2020 and said that it will happen at one go. It sold ETF holdings worth Rs 3,000 crore to meet the 8.5 percent commitment.

The EPFO's decision to invest in equities has been widely regarded by market experts as the right way of diversifying its investments. But the choice of funds has been a question mark.

Effective July 2015, the Employees' Provident Funds Organisation started to invest a part of its corpus in equities. Initially, it decided to invest 5 percent of its incremental inflows (fresh inflows) in three exchange-traded funds (ETF); SBI – ETF Nifty 50, UTI NIFTY ETF and UTI SENSEX ETF. Eventually, it put more money in equities; first 10 percent and then eventually 15 percent by 2017.

Simultaneously, the EPFO also decided to invest in two other ETFs that were constructed to help the central government divest its holdings in state-owned companies – CPSE ETF (Central Public Sector Enterprises) and Bharat 22 ETF.