EPFO may consider more govt bonds and equity investments

The proposals are aimed at ensuring high returns for provident fund subscribers and they come after the EPFO cut the interest rate for 2021-22 to 8.10%, the lowest in four decades.

“In our upcoming meeting, we will discuss a proposal of fungibility that should allow fund managers to invest more in higher yielding government bonds instead of the mandatory corporate bonds,” Prabhakar Banasure, a member of EPFO’s central board of trustees, told ET.

The retirement fund body’s investments in corporate bonds are in the debt of top-rated, primarily state-run, companies. These are yielding as much as 64 basis points, or 0.64 percentage point, lower than state government securities.

The Finance Investment and Audit Committee of the retirement fund body is likely to meet on Tuesday.

Banasure said he would also propose to raise the upper investment limit for equities to 25%. Currently, the EPFO invests between 5% and 15% in the equity market through exchange-traded funds.

“EPFO has earned nearly 14% returns from equity investments so far in 2021-22,” he said.

This gain is significantly higher compared with the returns from debt investments.

Last week, the EPFO invested Rs 3,675 crore in Nuclear Power Corp bonds, which offered 6.89% for 15 years.

Similar-maturity central government bonds yielded about 7.27% annualised on March 23, the day the EPFO made the investment. A day earlier, the Haryana government offered a 7.53% annualised yield as it raised 15-year money via bonds.

The EPFO invests only through the primary market. The last bond sale from the central government was on February 4 and it isn’t scheduled to sell any more until the end of the fiscal year. State governments, however, continue to sell papers via Reserve Bank of India auctions. The EPFO gets regular deposits, and it cannot sit idle on cash.

The EPFO likely invested at least Rs 10,000 crore in top-rated public-sector company bonds including Indian Oil Corp, Hindustan Petroleum Corp and National Bank for Agriculture and Rural Development, some of which have offered rates up to nine basis points less than similar-maturity government bonds, ET reported on March 2.

“For this (low-yielding corporate bonds), the EPFO is suffering losses,” said Banasure.

“Fund managers of the EPFO are not to be blamed as they have to be compliant with the EPFO investment pattern,” said Ajay Manglunia, managing director and head of debt capital market at JM Financial. “The Central Board of Trustees should give flexibility to fund managers, who can manage it better, especially if there are enough opportunities to earn higher yields.”

The EPFO can invest 45-70% of the member deposits in government securities, including central and state government bonds. After the investment in equities, there is a minimum of 20% investment space for corporate bonds.

“EPFO’s aim should be to maximise investment returns, particularly when our members have suffered a straight 40-basis-point cut in the rate (which was cut to 8.1% from 8.5%),” said Banasure.

The total corpus of the EPFO was Rs 15.69 lakh crore (more than $209 billion) at the end of March 2021, according to latest available data. In terms of asset size, it ranks eighth among sovereign pension funds and 33rd among top asset owners of the world.