Reports suggest that the EPFO may increase its investments in equity markets upto the maximum limit of 15 per cent of incremental deposits. In the ongoing year, around 10 per cent of the additional funds were invested in exchange traded funds.
Search for higher returns needs to carefully weigh risk-reward ratio
By: Editorial
March 30, 2023 06:31 IST
On Tuesday, the central board of trustees of the Employees’ Provident Fund Organisation (EPFO) recommended an interest rate of 8.15 per cent for 2022-23 for its subscribers. This is only marginally higher than the 8.1 per cent paid to members in 2021-22. While some may demand higher returns, at a higher interest rate of 8.2 per cent, the EPFO would have been left with a surplus of only Rs 113 crore as per reports. After the interest payout now, EPFO will be left with a surplus of around Rs 664 crore. The organisation, however, needs to be careful about its assessment of its portfolio. Last year, while the EPFO had projected a surplus of Rs 350-400 crore, it actually registered a deficit of Rs 197 crore.
As the bulk of the funds with the EPFO are parked in government securities, offering higher rates involves investing in either high yielding corporate bonds or allocating a greater portion of the portfolio to equities. The 10-year G-Sec yield is currently around 7.3 per cent. And during the fourth quarter (January-March) of the ongoing financial year, the interest rates offered on small saving instruments such as the national savings certificate and the public provident fund were lower at 7 per cent and 7.1 per cent respectively. The search for higher yield which involves taking on greater risk requires careful assessment. In the past, investments in securities of companies such as Dewan Housing Finance Corporation, IL&FS and Reliance Capital, Yes Bank only served to underline the risk. While the total exposure to such risky investments has been pegged at Rs 4,500 crore, there is little clarity on how much the organisation expects to get back.
Reports suggest that the EPFO may increase its investments in equity markets upto the maximum limit of 15 per cent of incremental deposits. In the ongoing year, around 10 per cent of the additional funds were invested in exchange traded funds. While the time horizon for such investments is typically more long-term in nature, as the EPFO is one of the largest social security organisations in the world — the organisation has 6.7 crore contributing members — it must be careful with its corpus. It must minimise the risks for its contributing members, as it seeks higher returns. It needs to manage the risk-reward ratio of its investments efficiently, while being more transparent about its investments.
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