TREND: Equity ETF assets growth hinges upon EPFO investments

10 May 2022
 
The four exchange traded fund schemes in which the Employees Provident Fund Organization holds it equity exposure is largely driving the high growth in ETF assets in the domestic funds industry.
 
As of Mar31, the assets under the four broad-based equity market ETFs of SBI Mutual Fund and UTI Mutual Fund which gets the EPFO investments in equities, were 2.51 trln rupees which made up for around 91% of all broad-market equity ETF assets and around 75% of all equity ETF assets.
 
The last financial year, 2021-22 (Apr-Mar), saw the assets of these four ETFs—SBI Nifty 50 ETF, SBI Sensex ETF, UTI Nifty 50 ETF and UTI Sensex ETF — grow by 45%.  In comparison, actively managed equity scheme assets were up by a lower rate of 39%, and all ETF assets grew by 49%.
 
Adjusting for the Nifty 50 Total Returns Index's one-year return of 20.26 as of Mar31, the assets growth of the four ETFs was 21%.
 
EFPO has to invest 5-15% of its incremental corpus every year in the equity ETFs, and around 80% of total assets of the four ETFs are is estimated to be on account of EPFO investments.
 
The EPFO deploys its equity investments between SBI MF ETFs and UTI MF ETFS in the ratio of 75-25.
 
Half-yearly statutory disclosures by SBI MF's Nifty 50 ETF indicated a single investor accounted for 74% of its Nifty 50 ETF assets and 90% of its Nifty Sensex assets as of Mar 31. This, say analysts, is EPFO money.
 
Thus, the total assets of the two SBI MF ETF assets were 1.96 trln assets of which 1.56 trln rupees, or 79.4%, were on account of EPFO investments.
 
Similarly, UTI MF's Nifty 50 and Sensex ETF assets were 545 bln rupees on Mar 31 of which an estimated 85%, or 465 bln rupees, was on account of EFPO's investment.
 
The National Stock Exchange of India recently said that the assets of ETFs and index funds tracking the Nifty 50 crossed a new milestone of 2 trln rupees. Vikram Limaye, the exchange's Managing Director and Chief Executive Officer, said that this due to "efforts put in by all stakeholders including Ministry of Finance, Ministry of Labour & Employment , SEBI, EPFO (Employees Provident Fund Organization), asset management companies, investors, trading members, etc."
 
Clearly, the EPFO investments in equity ETFs has a substantial say in the mutual fund industry's ETF asset growth story.
 
Back- of- the- book calculations indicate that EPFO's ETF investments grew by 21% on year to 2.03 trln rupees and after adjusting for index returns, around 350 bln rupees of fresh inflows took place in the four ETFs.
 
The assured nature of EPFO incremental corpus coming into the Nifty 50 and Sensex tracking equity ETFs have helped enabled share prices of Nifty 50 and Sensex stocks weather recent foreign institutional investor outflows in equities.
 
Going forward, this trend is expected to continue. But there will be pressure on EFPO to book profits in old ETF assets to provide returns of over 8% to its subscribers in the current financial year. EPFO has been investing in equity ETFs since 2015-16 (Apr-Mar).