The Employee Provident Fund Organization (EPFO) is now contemplating to consider proposals that would allow its fund managers to park a major part of the subscribers’ money in government captivity that helps earn more profits than corporate bonds offering high-interest rates apart from increased exposure to markets.
The proposals to re-arrange the available subscribers’ capital to earn high returns come amidst the organization’s announcement to cut the interest rates on the employees’ provident fund (EPF) deposits from 8.5 per cent to 8.1 per cent for the FY21.
EPFO’s current investments
Currently, the fund has invested a part of its money in corporate bonds of mainly state-owned blue-chip companies. These bonds yield returns up to 64 basis points that are below state government values. The EPFO invests somewhere between five and 15 per cent of its capital in the stock market through exchange-traded funds (ETFs).
The organization is now mulling the idea of raising the upper investment limit in stock investments to 25 per cent. In 2021-22, the organization earned around 14 per cent return on its capital investments, which is way more than the returns earned on debt instruments.
For example, the EPFO invested ₹3,675 crores in Nuclear Power Corp bonds that offer 6.89 per cent over 15 years. The organization earned around 7.27 per cent interest on similar central government bonds on March 23, 2022. Before this, the Haryana government had offered yearly returns of 7.53 per cent by raising money through the issue of 15-year bonds.
Currently, all investments by the EPFO are through the primary market. At present, the organization has invested nearly ₹10,000 crores in corporate bonds of blue-chip companies including Indian Oil Corp, Hindustan Petroleum Corp and the National Bank for Agriculture and Rural Development. Some of these bonds offer rates up to nine basis points which is more or less similar to the yield on similar government bonds.
Seeking benefit of market-linked returns
The current investment pattern has resulted in the EPFO making losses most of the time. This can be attributed to the stringent rules and limitations regarding the organization’s investment pattern that the fund managers must adhere to. The idea behind this meeting would be to lend greater flexibility to fund managers adept at better fund management, especially, in funds that earn higher returns. Currently, the EPFO invests nearly 45-70 per cent of its subscribers’ deposits in government securities like central and government bonds, which means that there is enough scope to invest in corporate bonds even after parking a part of the capital in shares.
Many subscribers had resented the EPFO’s decision to lower the interest rates to 8.1 per cent sharing that this is the lowest interest rate that the organization had offered to its members since its inception. Before this, the EPF rate has been lower than 8.5 per cent in three years – 1979-80, 1980-81 and 2011-12.
Optimizing EPFO’s huge corpus
The idea behind putting money in EPF accounts is to compound money sans any risk. However, the rate cut comes at a time when people are struggling against inflation as the prices of essential commodities have shot up beyond expectations.
The EPFO’s goal to earn maximum returns to its subscribers is not too far-fetched considering its humongous corpus which was over ₹15 lakh crores on March 31, 2021. Details suggest that the organization is sitting on a corpus that ranks eighth among sovereign pension funds and 33rd among the world’s largest asset holders in terms of size.