Markets

Why taking higher exposure to Sensex ETF is a significant move by EPFO

KS Badri Narayanan Chennai | Updated on August 31, 2019

A file photo of Ashishkumar Chauhan, MD and CEO, Bombay Stock Exchange

Sensex beats Nifty's return on almost all periods

A few weeks ago, retirement body EPFO, which handles the provident fund savings of private sector employees, decided to equally distribute its equity investments in Nifty 50 and Sensex — the two main stock indices in the country.

The EPFO started investing in equity markets from mid-2015, when its board approved investment of 5 per cent of its incremental corpus in exchange-traded funds. It, subsequently increased the equity investments to 15 per cent. Initially, it had decided to invest 100 per cent of its corpus only in Nifty 50 ETFs. However, in 2016, it decided to park 25 per cent of the corpus in ETFs based on the Sensex too.

The EPFO’s investment managers have the mandate to invest in shares of listed companies that have market capitalisation of not less than ₹5,000 crore, as well as derivatives with the shares as underlying, traded in either of the two stock exchanges.

EPFO can also invest in units of mutual funds regulated by the Securities and Exchange Board of India which have minimum 65 per cent of their investment in listed equities on the BSE or the NSE. Besides ETFs or index funds on the Sensex or the Nifty 50, it also has the mandate to invest in ETFs issued by SEBI-regulated MFs constructed specifically for disinvestment of shareholding of the Government of India in body corporates. With the sole purpose of hedging, EPFO can consider investing in exchange-traded derivatives too.

Beyond this, 45-65 per cent of the fund is invested in Government Securities (G-Secs), 35-45 per cent in listed debt and 5 per cent in short-term debt.

According to its annual report ending March 2017, the fund had invested ₹14,373 crore in Nifty, Sensex and CPSE ETFs through EPF (Employee Provident Fund), ₹6,244.95 crore through EPS (Employee Pension Fund), and ₹366.62 crore through EDLI (employee deposit-linked insurance scheme).

Sensex sahi hai!

The rationale of this move seems to be that today, the point-to-point returns posted by the Sensex over different scales show that it has beaten the Nifty handsomely. For instance, on a four-year scale, since the time EPFO started investing in equities, the return posted by the Sensex is higher by a good 3.7 percentage points at 41.45 per cent, against the Nifty’s 37.76 per cent. On a 10-year scale, Sensex’s return is higher at 134.47 per cent against Nifty’s 132.9 per cent, which is quite significant.

In the last one year, the Nifty has posted a negative return of 5.6 per cent, whereas the Sensex’s return dipped just 3.51 per cent.

However, if the EPFO is really convinced that the Sensex is a better index, the question is why cannot it deploy the entire funds to the Sensex. Holding both Nifty and Sensex ETFs doesn’t really diversify the portfolio given the overlaps between the two indices.

The EPFO should also actively consider investing in index funds launched by the NSE and the BSE, apart from ETFs. Besides, it should also take a call on gold exchange-traded funds, which are currently giving decent returns.

Published on August 31, 2019

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