EPFO Considers High-Powered Committee to Overhaul Investment Strategy
The Employees Provident Fund Organisation (EPFO) is poised to establish a high-powered committee tasked with a comprehensive review of its investment objectives, policy, and guidelines. This strategic initiative aims to secure enhanced returns on its colossal corpus, which stands at nearly Rs 31 lakh crore, derived from contributions by over 30 crore members.
Committee Formation and Equity Market Expansion
The proposal for this committee, introduced by a government representative, was deliberated during last week's investment committee meeting. According to a source present at the meeting, the panel will comprise experts from diverse fields and multiple government departments. A key agenda item under consideration is the feasibility of broadening equity market investments beyond the current allocation to exchange-traded funds (ETFs) that track benchmark indices like the NSE Nifty and BSE Sensex.
Current Investment Pattern and Portfolio Analysis
Under the existing investment pattern notified in April 2015, EPFO allocates 45-65% of fresh accretions to government securities, while 20-45% is directed towards corporate debt instruments. Short-term debt instruments are permitted up to 5%, leaving approximately 5-15% for equity investments via index funds. As of December 31, officials reported that nearly 88% of the portfolio was invested in government bonds, with 10.6% in equities.
Exploring New Investment Avenues
During the meeting, Crisil, the organization's consultant, presented an analysis on the feasibility of investing in emerging and sunrise sectors such as rare earths, railways, and defence. The assessment also examined yields from various indices, including:
- Sectoral indices for banking and financial services, information technology, and FMCG
- Global indices
- Factor and style-based indices tracking momentum stocks, value stocks, and low volatility stocks
Driving Factors for Change
The retirement fund body is actively working to boost its income, as it has been announcing significantly higher annual returns for members compared to prevailing yields on government bonds in recent years. EPFO is set to announce the interest rate for the current financial year next month. This push for reform follows recommendations from the Reserve Bank of India (RBI), which last year suggested a series of measures to improve EPFO's investment management and accounting practices.
Additional Reforms and Incentives
In related developments, EPFO has appointed IIM Kozhikode to examine its equity exit policy and interest stabilisation reserve. Furthermore, the investment panel approved a proposal to introduce performance-linked incentives for fund managers. Under this new benchmark methodology for debt investments, greater funds will be allocated to managers who deliver superior returns.
A source elaborated on the new methodology, stating, "It includes an accelerated negative marking provision for any fund manager who fails to meet benchmarks, which will adversely affect portfolio allocation. The approach also discourages parking funds in low-yielding TREPS—short-term, low-risk money market instruments."
This comprehensive review and potential committee formation underscore EPFO's commitment to optimizing returns for its vast member base while adapting to evolving market dynamics.
