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Government plans radical changes in EPF law

MUMBAI: The Employees' Provident Fund Organisation (EPFO), the entity that manages the country's pension fund, on Thursday started investing in the stock market for the first time in its 64-year history, putting token amounts in two index-based exchange-traded funds (ETFs) run by SBI Mutual Fund.Although the EPFO is allowed to invest up to 15% of its incremental inflows in stocks, Bandaru Dattatreya , minister of state for labour and employment, said that to begin with it would put in only 5% of its incremental flows, or about Rs 400 crore per month, reflecting a cautious approach by a first-time equity investor.Since 1951, when the organization was set up, the central decision-making body for the fund manager has refrained from investing in stocks because of the higher risks associated with it and had stuck to buying government securities and bonds issued by state-run companies. The pension fund manager, which manages money on behalf of about 4.7 crore subscribers, now plans to put in about Rs 5,000 crore in equities till March 2016 through the ETF route.ETFs are those funds whose portfolio exactly replicate the composition of an index and, hence, their returns too. Currently, EPFO manages assets worth about Rs 8.5 lakh crore, which is equivalent to about 12% of BSE's market capitalization.K K Jalan, central provident fund commissioner, said that to start with EPFO will not invest in stocks directly but through SBIMF's nifty and sensex ETFs in the 75-25% ratio, but this could change later.Going forward, the pension fund manager is also expected to invest in the CPSE ETF , which was launched about two years ago and is run by Goldman Sachs MF. Sources said that a new tranche of the CPSE ETF, which consists only of stocks of public sector companies, could soon be launched which will also lead to divestments by the government in a basket of PSUs.UTIMF - another fund house majority-owned by four state-run entities SBI, LIC, Bank of Baroda and Punjab National Bank - is also in the process of launching nifty and sensex ETFs. Sources said these two funds could be launched next month and are likely to attract EPFO money. Jalan did not rule out active fund management of its equities portfolio by the EPFO in future.During the launch of EPFO's equity investment, Arundhati Bhattacharya, chairman, SBI, appreciated the organisation's decision to invest in equities and said that rate of interest paid by banks (in FDs) cannot always match the rate of inflation, mainly when inflation is high. On the other hand, in the long run, equity markets have always kept faith by giving superior returns. The move by EPFO to invest in equities was "a decision taken in the interest of people who subscribe to EPFO", Bhattacharya said.Ashishkumar Chauhan, MD & CEO, BSE, said that investing in stock markets by pension funds is an internationally accepted practice and world over pension fund subscribers in many countries have got better returns by investing in equities."EPFO using ETF as the vehicle for such investments has made the entire process transparent," Chauhan said.