EPFO will start investing in equity markets next month, the labour minister said, as part of a reform drive aimed at boosting the economy.
With more than $100 billion of assets from some 80-million members, the Employees' Provident Fund Organisation (EPFO) is one of the world's largest. It will begin by investing in exchange traded funds, with the goal of earning higher returns.
"We are starting with 1 per cent in July and by the end of this (fiscal) year it will go up to 5 per cent" of annual investments), Labour Minister Bandaru Dattatreya told Reuters in an interview late on Wednesday.
India's fiscal year ends March 31.
An EPFO official said the fund annually invested nearly Rs 1 trillion ($15.72 billion), out of which it could invest nearly Rs 50 billion ($785.95 million) in equities between July and March.
The move is part of Prime Minister Narendra Modi's agenda to reform economy, which includes changing tax, land and labour regulations.
The new EPFO rules may help Modi hit an ambitious target of raising nearly $11 billion through selling shares in state-run firms and minority stakes in private companies this fiscal year, a senior government official said, because for the first time EPFO will be able to buy the government's shares.
"In the past, the government has nudged the state-run Life Insurance Corp of India into buying its assets when market interest is low, a model that could be replicated with EPFO", the official said.
Dattatreya said that if the experiment was successful, the fund could increase its equity exposure to 15 per cent of annual investments over the next few years. At current investment rates, that would be about $2.5 billion a year.
Some unions have opposed EPFO investing in share markets as they worry that their life-long savings could be depleted in a market crash.
Until now, EPFO's market exposure has been limited to government and corporate bonds. It earned a return of 9.22 percent on its investments last fiscal year, and paid 8.75 percent to its subscribers.
But with yields falling on debt securities, the returns are likely to be "much, much more moderate" this year, a senior official at the EPFO said.