The Employees’ Provident Fund Organization (EPFO) wants the reported investment pattern to be adjusted, but without any increase in exposure to equities, which are still very low. The pension fund body, with a cumulative corpus of Rs 17 trillion, has proposed halving the threshold of minimum investments in debt and related instruments such as bonds issued by public and private sector units, public banks and debt ETFs to 10% from 20% of its annual incremental deposits. EPFO wants to use the space created by this easing to increase its investments in government bonds.

EPFO’s annual incremental deposits are now about Rs 2.3 trillion.

The pension fund body wants the current maximum limit for investments in government paper to be increased from 65% now to 75%. Status quo will prevail for all other class of investments, including approximately the current 15% limit in equities. Equity investments have delivered EPFO ​​higher returns in recent years, but the organization prefers to exercise caution given the current market volatility.

The change in the investment pattern was necessary, according to a note EPFO ​​shared with members of the Central Board of Trustees (CBT) ahead of their meeting recently held in Guwahati, as it was difficult to meet the 20% investment criteria. in corporate bonds in the absence of available options to invest in private sector bonds.

Due to some write-downs, EPFO ​​has suspended private sector bond investment since April 2019, which were however lifted by CBT at its November 2021 meeting.

During the April-November FY22 period, EPFO ​​was only able to invest Rs 15,500 crore or less than 9% of its mandatory investment in debt and related instruments, leaving about Rs 31,000 crore to be parked in such instruments before March 31, 2022 .

“In the next three months, by March 31, 2022, there is an additional requirement of about Rs 31,000 crore investment that is unlikely to be met, if the current situation of PSU supply does not materially change,” EPFO ​​said.

If not, EPFO ​​will have to consider investing the same amount in short-dated PSU securities ranging from three to five years, which would be about 80-100 basis points lower than longer-dated corporate bonds. This would result in a significant reduction in the portfolio return for EPFO. It could also represent a likely violation of the investment pattern.

The lower-than-mandatory investment is mainly because EPFO ​​found it difficult to get enough windows to invest in debt and related investments.

Aside from the curtailment of investment in private sector bonds, a lower supply of PSU bonds, a limited supply of government-funded bonds and a huge excess liquidity in the banking system over the past 18-20 months are some of the reasons that in the way of meeting the mandatory investment criteria under the category.

For the current budget, CBT, the EPFO’s top decision-making body, has recommended cutting the interest rate on advocacy fund deposits for 2021-22 to a more than four-decade low of 8.1% for its subscribers of nearly 6.5 ​crore. This is the lowest EPF rate since 1977-78, when it was 8%, but still higher than the returns small savers could get with other fixed-income plans.

The decision to cut the rate was mainly due to the current bearing interest regime that has been in effect in recent years, which has resulted in lower returns for the EPFO ​​from debt investments. The return on debt was 6.78% in 2020-21, compared to approximately 7.5% in 2019-20 and 8.5% in 2018-19. Debt instruments account for 85% of total investments, with the rest parked in equities.

Sources said EPFO ​​has already communicated its intention to adjust the investment pattern to the Ministry of Labor, but the Ministry has yet to take a phone call.

This post EPFO aims to invest in government securities

was original published at “https://www.financialexpress.com/market/epfo-seeks-to-raise-investments-in-g-secs/2467222/”