Provident funds: ET Edit: EPF should diversify its asset classes

The 8.5% return recommended by the Employee Provident Fund Organization (EPFO) for 2019-2020 – 8.15% now and 0.35% in December – is 15 basis points lower than in 2018 -19. The rate of return is higher than the interest currently offered on bank deposits, but lower than the return managed by the National Pension System (NPS) which has greater flexibility in the allocation of funds between asset classes. The EPF – with more than 22 crore in accounts and a corpus of more than Rs 12 lakh crore – invests 85% in debt and 15% in equity. EPFO’s ultra-conservative investment model is the reason it has failed to achieve higher returns on workers’ savings. This must change. The EPF corpus is large enough to diversify asset classes and achieve the right compromise between risk and return.

The one-year return of the NPS, even for government employees, is about 150 to 200 basis points higher than that of the EPF. The system now gives these subscribers the possibility of investing up to 50% in shares. To achieve higher returns, the EPF should invest in a more diversified asset class rather than just bonds covered in equities. It should diversify into venture capital, private equity and real estate, to establish rights over larger portions of the economy’s productive capacity and vary the degree of risk assumed. India does not have enough venture capital. By refusing to provide venture capital, India’s largest retirement savings pool is stifling innovation and job creation while diminishing returns for itself.

The EPF can also create a special situations fund to invest in troubled assets undergoing recovery. The most important point is to mitigate risk by investing in various asset classes. It also requires hiring fund management talent and aligning their compensation with performance. Canadian public pension funds are a good model.