EPFO may lower interest rate after hiving off ETF portion

The Employees' Provident Fund Organisation (EPFO) is likely to cut interest rate on employee accounts since it is separately crediting 15 per cent of the amount in the form exchange trade funds (ETF) units, which is reported to offer higher returns.

The retirement fund body deposits the remaining portion of the accumulated PF amounts into lower-yielding bonds and other such instruments.

EPFO offered 8.65 per cent interest on deposits of its 45 million subscribers for the 2016-17 financial year. But this could fall in the 2017-18 financial year after the EPFO decided to segregate part of the corpus to equity-linked investments that yield higher returns.

The argument is that since the EPFO is directly crediting 15 per cent of the entire fund corpus to exchange traded fund (ETF), returns on the remaining portion of the provident fund accounts would be insufficient to both administer the fund and give higher returns.

Under the policy for valuation and accounting of equity investments evolved in consultation with IIM Bangalore, the EPFO will credit ETF units into the provident fund account of the subscribers by end of the current fiscal. Thus every PF subscriber will have their account balances in the form of a mix of cash and ETF units.

However, subscribers will be able to realise the entire rate of return on these equity linked investments only at the time of withdrawals.

The subscribers will have the option to withdraw money while taking advances from their accounts, either by liquidating ETF units or from cash component.

Amidst falling interest rates, the finance ministry has been nudging the labour ministry to align the EPF rate with its small saving schemes like public provident fund.

In December last year, the EPFO trustees had decided to lower the rate of interest on EPF to 8.65 per cent for 2016-17 from 8.8 per cent provided for 2015-16.