EPFO to invest in asset-backed securities, Rs 9,000 crore/year now

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November 11, 2021 2:45 AM

Since August 2015, EPFO has been investing in the stock market through exchange-traded funds (ETFs). As on March, 2021, it invested Rs 1,37,895.95 crore, but redeemed units worth Rs 14,909.54 crore with a capital gain of Rs 8,361.81 crore.

EPFO paid 8.5% returns to its subscribers for the last two years.EPFO paid 8.5% returns to its subscribers for the last two years.

The Employees’ Provident Fund Organisation (EPFO) may invest up 5% of its incremental deposits — close to Rs 9,000 crore at current level — annually in select private sector bonds, REITs, InvITs, units issued by category-I & category-II alternative investment funds and AA-rated Basel III Tier I bonds, in order to enhance the yield on investments. The move is part of diversification of investments across asset classes, which are part of the approved pattern of investment for the organisation, but have remained largely untapped so far.

The EPFO wants to diversify its investments in view of the falling yields on central government securities (CTG) and state development loans (SDL) investments and also to avoid concentration risks on investments only in these instruments and public sector bonds. EPFO paid 8.5% returns to its subscribers for the last two years.

Armed with the backing of portfolio manager SBI MF, consultant Crisil and EPFO’s own Finance Investment & Audit Committee (FIAC), the central board of trustees (CBT), the highest decision-making body of the retirement fund, is likely to give its go-ahead for investments of up to 5% of EPFO’s annual incremental deposits in these high-yielding asset classes, in its next sitting scheduled on November 20.

“Considering the trend of falling yields on CTG and SDL investments, the risk of concentration of investments only in CTG/SDL/PSU bonds, and the need for yield enhancement and diversification of the investments into other asset classes like Invits, AIFs, among others, which are included in the pattern of investment which has been notified by the ministry of labour and employment as applicable to EPFO and exempted trusts, it has become essential to review the restrictions placed on the investments in certain asset classes as decided by the CBT in its 207th Meeting held April 1, 2015, and the 225th meeting held on August 21, 2019,” EPFO said in the agenda note for its members to deliberate upon.

Since August 2015, EPFO has been investing in the stock market through exchange-traded funds (ETFs). As on March, 2021, it invested Rs 1,37,895.95 crore, but redeemed units worth Rs 14,909.54 crore with a capital gain of Rs 8,361.81 crore. EPFO’s Rs 1,22,986.4 crore remaining investment in ETFs, as on March 31, 2021 had a notional value of Rs 1,60,017.14 crore, signifying a 14.67% return. As against this, average G-sec yeild for last 10 years, as on July 2021, was 7.59%.

As per the notified investment pattern, EPFO can invest its incremental deposits, amounting to around Rs 1.8 lakh crore a year, between 45-50% in government securities, 35-45% in debt instruments, up to 5% in short-term debt instruments, between 5-15% in equities and up to 5% in asset-backed, trust structured and miscellaneous investments.

The asset-backed, trust structured and miscellaneous investment category was modified in April this year to give way for investment in units issued by category I and category II Alternative Investment Funds (AIF) regulated by the Securities and Exchange Board of India (SEBI). Investments in units issued by Real Estate Investment Trusts (REITs), Asset Backed Securities, and units of Infrastructure Investment Trusts (InvIT), regulated by the market regulator, were notified in 2015.

But, the EPFO could not exercise these options at that time following CBT’s decision to defer such investment decisions keeping in view of risk profile of some instruments. It wanted to fully understand the advantages and disadvantages in such assets before putting in money in such asset classes.

Consequent to certain major defaults which occurred in private sector bonds, the CBT further restricted investment in private sector bonds till further orders in its 225th meeting held on August, 2019. Status quo prevails even now.

In the next meeting, CBT is likely to empower the FIAC to decide upon the investment options and criteria/ guidelines for investment in all such asset classes which are included in the pattern of Investment as notified by Government of India. Further, all major decisions taken by the FIAC from time to time shall be placed before the CBT.

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