The Employee Provident Fund Organisation (EPFO) is one of the largest social security funds in the world. At the last count, its corpus was at about R5 lakh crore. In addition, about 3,000 exempted funds have a corpus of about R2 lakh crore. The exempted funds are those of employees of certain employer organisations, who form a trust and invest the contributions of employees through their own trusts, instead of depositing the funds in EPFO. The exemptions are granted by the EPFO subject to certain conditions being fulfilled, and the employee unions and employer agreeing to such an arrangement. However, the exempted establishments have to follow the same investment pattern as the EPFO.
In view of the large corpus (of about R7 lakh crore), several attempts were made in the past to persuade the organisation to invest in capital market. This attempt was particularly strong during 2010-12 period, when I was the Central Provident Fund Commissioner. We had strongly resisted the move, and finally the central board of trustees had to demand that the finance ministry should, in such a case, guarantee the principal and a minimum rate of return. After this, the persuasion was dropped.
How does the EPFO invest, then? As per the present pattern, 25% of the corpus is invested in central government securities, 15% in state government and government-guaranteed PSUs securities, 30% in public sector bonds with above certain minimum ratings, FDs, etc. The remaining 30% can be invested in any of the above. At present, some private sector companies have also been included, subject to some stringent conditions. This ensures that the returns every year are actuals received (interests, coupon rates, etc.) and credited to the interest account. The capital remains intact, which is ensured, as the securities and bonds are held to maturity and there is no chance of mark-to-market gains/losses.
There are reports that the government is now thinking of giving tax breaks to mutual funds, to attract household savings and pension funds. The proposal for household savings will be based on voluntary investment by individuals, and tax-breaks are one of the many important factors considered in making investment decisions. This is perhaps even more necessary, as less than 2% of household savings are invested in the capital market, mainly because ordinary people perceive return of capital to be more important than return