ET Edit: EPF should diversify its asset classes

The 8.5% return recommended by the EmployeesProvident Fund Organisation (EPFO) for 2019-20 – 8.15% now and 0.35% in December – is 15 basis points lower than in 2018-19. The rate of return is above the interest now on offer on bank deposits but lower than the return managed by the National Pension System (NPS) that has more flexibility in the allocation of funds across asset classes. The EPF – with over 22 crore account holders and a corpus of over Rs 12 lakh crore – invests 85% in debt and 15% in equity. The EPFO‘s ultra-conservative investment pattern is the reason why it has failed to garner higher returns on workers’ savings. That must change. The EPF corpus is large enough to diversify asset classes and achieve the right trade-off between risk and return.

The one-year return on NPS even for government employees is about 150-200 basis points above the EPF’s. The scheme now gives an option to these subscribers to invest up to 50% in equities. To garner higher returns, the EPF must invest in a more diverse class of assets instead of just bonds glazed with equity. It should diversify into venture capital, private equity and real estate, to establish claims on broader 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 pool of retirement savings is stifling innovation and job creation while lowering the return for itself.

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The EPF can also set up a special situations fund to invest in distressed assets being turned around. The larger point is to mitigate risk by investing across varied asset classes. This also calls for hiring fund management talent and aligning their compensation with performance. Canadian public pension funds are a good model.



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