The Employees’ Provident Fund Organisation‘s (EPFO) reported move to invest up to 5% of its annual deposits in alternative investment funds (AIF) is welcome. It widens the array of asset classes for EPF subscribers to diversify their risk and maximise returns, while supplying capital to infrastructure, venture capital and small and medium enterprises.
Apportioning a sliver of retirement savings to venture capital will help startups to grow and expand, boosting entrepreneurship and innovation, and enable EPF subscribers to earn better returns. Similarly, investment in infrastructure investment trusts – such as the National Highways Authority of India’s InvIT – will make long-term capital available for infrastructure projects. The EPF corpus – of over ₹15 lakh crore – is ample to expand across asset classes and get the right trade-off between risk and return. But its ultra-conservative investment pattern – 85% of the EPFO corpus is invested in debt, mostly public, with its exposure to equity being capped at 15% – is to blame for the suboptimal returns. The yield on 10-year g-secs is about 6.3%, around 220 basis points lower than the return on EPF for 2020-21, pushing the government to subsidise the returns for EPF subscribers. The one-year return for the National Pension System (NPS) even for government employees, who have the option to invest up to 50% in equities, is more than 200 basis points higher than the EPFO’s.
The EPFO will have the option to invest in AIFs whose corpus is equal to or more than ₹100 crore, with maximum exposure to a single AIF capped at 10% of the AIF size. Sensibly, this limit would not apply to a government-sponsored AIF. Project preparation, implementation, monitoring and reporting integrity must all improve.