Separating equity, debt units will benefit EPFO subscribers

In case of early withdrawal, they will be able to choose the instrument from which they wish to redeem

The Employees’ Provident Fund Organisation (EPFO) on Thursday cleared a new accounting policy for its equity-linked investments. Under the policy, the 15 per cent of PF contributions parked in equities will be allotted as mutual fund units to all the subscribers. These units can be redeemed by subscribers when they exit or withdraw the accumulated money. The EPFO has been investing in equities for over two years but there was no consensus on how the gains from this would be passed on to investors. 

It has now decided this will be done by allocating units to each subscriber. “Now, a subscriber will know exactly how much of his money is in debt and how much in equity, as they will start getting units of their equity portion by March,” said Manoj Nagpal, chief executive officer, Outlook Asia Capital.

Senior officials in the sector said the withdrawal norms remained the same and subscribers can’t redeem their money whenever they want. They can partially withdraw their money if they need funds for marriage, education for self or children, construction of house and a few other reasons. What will help subscribers is that they can choose the portion from which they wish to withdraw. For example, if the withdrawal is being made during a bull run, the 15 per cent portion can do extremely well in comparison to the debt portion, and investors can choose to encash some of this profit or vice versa. 

There is still no clarity on how long the subscriber can hold the units after retirement. “We need to wait for the fine print on the issue. Though it is reported in the media that subscribers can continue to hold units for three years after their retirement, but are yet to get some clarity from EPFO,” said a financial planner from Mumbai.  

From the next financial year, PF subscribers will have two accounts, one being for debt, where 85 per cent of the money is invested and the other for the part invested in equity. On the equity part, returns will depend on the market price of the exchange-traded fund (ETF) at the time the investment is redeemed. The payment under equity would be calculated by multiplying the number of accumulated units with the prevailing market price of the ETF. 

The EPFO is allowed to invest up to 15 per cent of PF money in equity through ETFs while the remaining 85 per cent is parked in debt instruments. The EPFO started investing into ETFs in August 2015. At present, EPF yields are at 8.65 per cent. 

The total money invested in equity since 2015-16 is around Rs 32,500 crore and the return has been healthy at around the annual rate of 21.8 per cent. The pension regulator has an annual incremental corpus of more than Rs 1.2 lakh crore and 15 per cent of that will be at least Rs 18,000 crore.

KNOW YOUR RETIREMENT BENEFITS

• Under the policy, the 15% of PF contribution that is parked in equities will be allotted as mutual fund units to all the subscribers

• These units can be redeemed by  subscribers when they exit or withdraw the accumulated money

• The EPFO has been investing in equities for 2 years, but there was no consensus on how the gains from this would be passed on to investors

• Now, subscribers will know exactly how much of their money is in debt and how much in equity

• Withdrawal norms remain the same and subscribers can’t redeem their money whenever they want

• Subscribers can partially withdraw money if they need money for marriage or education, among other reasons