Central Board of Trustees (CBT) of the Employees’ Provident Fund Organisation (EPFO) approved a new policy for investing in Exchange-Traded Funds (ETFs), such as CPSE (Central Public Sector Enterprises) and Bharat 22.
Along with this, under project 2.01, a newer version of the operating system is being deployed which will result in the simplification of the claim settlement process.
- Better Returns for Employees: The main goal of this policy is to earn more income for EPF members. By investing in ETFs like CPSE and Bharat 22, which have given higher returns than government bonds in the past, the EPFO aims to improve the money in the EPF account.
- Diversified Investment Options: This policy also allows EPFO to invest in other assets like Infrastructure Investment Trusts (InvITs) and Real Estate Investment Trusts (REITs).
- Faster and Better Claim Settlements: Under project 2.01, a newer version of the operating system is being deployed which will result in the simplification of the claim settlement process.
- Improved Technology for Better Service: EPFO is working on improving its technology. With the new CITES 2.01 project, EPFO plans to make it easier to handle claims and reduce problems. The “one member, one account” system will make sure that employees don’t face any confusion when claiming their money.
Disadvantages of the Redemption Policy:
- Market Risks: While investing in ETFs can bring better returns, it is also risky. The value of ETFs depends on how the stock market is doing. If the market falls, the returns could be lower than expected.
- Five-Year Investment Lock-In: According to the policy, the ETF investments will need to be held for at least five years. This means that EPFO cannot quickly change its investment choices if the market is not performing well. If the market faces a downturn, the EPFO cannot adjust its investments immediately, which could impact returns in the short term.
- Complex Investments: Investing in REITs and InvITs is more complicated than regular government bonds. These types of investments require careful monitoring, and there could be challenges if EPFO doesn’t manage them properly.
- Benefits May Take Time: The positive effects of this policy will not be seen immediately. It will take time for the investments to show results, and during this time, the stock market could go through ups and downs. So, employees will need to be patient to see the full benefits of this decision.
Expected Returns in the Long-Term:
Now, let’s compare the historical returns of CPSE ETFs, Bharat 22, REITS, InvITs and the EPF.
Historical Returns Comparison:
| Investment Type | Annual Returns (5 Years) | Annual Returns (10 Years) | Annual Returns (20 Years) | Description |
|---|---|---|---|---|
| EPF (Employees' Provident Fund) |
8% | 8% | 8% | Invests primarily in government securities, bonds, and select public sector enterprises. A safe, low-risk option. |
| CPSE ETF | 10-12% | 7-9% | 7-9% | Invests in public sector companies, typically offers higher returns but is market-dependent. |
| Bharat 22 ETF | 9-11% | 8-10% | 8-10% | Invests in a mix of public sector companies across various sectors like energy, finance, and infrastructure. |
| REITs (Real Estate Investment Trusts) |
7-10% | 6-9% | 6-8% | Invests in real estate properties like malls, office buildings, and warehouses, offering stable returns but sensitive to property market conditions. |
| InvITs (Infrastructure Investment Trusts) | 8-11% | 7-9% | 7-8% | Invests in infrastructure assets such as roads, power plants, and telecom towers, typically providing stable returns with exposure to physical infrastructure. |
Impact on Employees:
- Better Financial Security: With this policy, employees can expect their retirement savings to grow more. By earning higher returns, they will have more money saved up when they retire. This can provide greater financial security for the future.
- Improved Trust in EPFO: The changes in how claims are processed will make the system more efficient. Employees will be able to get their EPF claims faster, and they will also feel more confident in the system. This will likely build more trust in EPFO among employees.
- Better Retirement Planning: The higher returns will allow employees to plan better for their retirement. With more money in their EPF accounts, they can ensure a comfortable life after they stop working. Employees who see better returns will also be encouraged to save more in their EPF accounts.
- Risks in the Short-Term: Some employees may be concerned about the risks of market-based investments, especially those who are close to retirement. These employees may feel anxious about the possibility of losing money if the market does not perform well. However, younger employees with more time to invest can benefit from the higher returns.
We will discuss more how this helps in our retirement planning once the changes are live and we have enough data on the performance.
All the information shared is for educational purposes only. The blog Finance Made Easy(financemadeeasy.in) and the author is not responsible for your financial decisions.
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