The decision of the Employees Provident Fund Organisation (EPFO) on Tuesday not to invest in equities is good news for its subscribers, who number upwards of 4.71 crore today.
The EPFO is a funding source for the government. The three schemes run by it —- the Employees Provident Fund, the Employees Pension Fund and the Employees Deposit Linked Insurance Fund — together have a corpus of over Rs250,000 crore (in unexempted schemes) and average collections of over Rs40,000 crore a year.
The corpus is predominantly invested in fixed income securities issued by the government and its entities. The investment pattern is 25% in government securities, 15% in state government bonds, 30% in public sector bonds.
The remaining 30% goes into any of the three categories as decided by the EPFO’s trustees.
Investment in private sector bonds is restricted to 10% of the total flows during the year. Mutual fund investments are restricted to gilt funds.
The return on the schemes is fixed by the trustees and stands at 8.5%, though it’s been upped to 9.5% for the year 2009-10 as a one-off payout.
The trustees have found surplus lying in the corpus and are keen to pay this out. The higher payout is not on account of better fund management or higher yields prevailing in the market.
The government is the beneficiary of all EPFO investments. Hence, the returns on the EPFO is based on the yields on government bonds and the yields on public sector entities bonds.
Government bond yields (longer maturities of 15 years and above) have ranged between 8% and 8.5% over the last two years (Feb 2009- Feb 2011), while state government bond yields have ranged between 8.2% and 8.5% in the similar period.
Corporate bond yields have ranged between 8.5% and 9.2% in the same period.
Assuming 40% of the corpus is invested at 8.5% and 60% of the corpus is invested at 9%, the return works out to 8.8%.
The fact that yields have only been rising in the market, leaves no scope for booking any profit.Yes, you guessed right.
The government takes money from you in the form of compulsory savings, creates inflation by spending recklessly and gives you real negative returns.
Real inflation as you all know and experience is much higher than the 8.3% levels that is statistically released. At least the government is making sure you get back your money plus some interest by issuing its own bonds (directly or indirectly) to the EPFO.
Investment in equities will only cause more damage to the real returns.
The finance ministry has been pushing the EPFO to invest in equities, to increase the returns on the schemes. However, as seen from the investment pattern, the investments will compulsorily go to equities of public sector undertakings.
The government is the majority owner of these undertakings and controls their management. The milking of state-run refiners by making them sell fuel at costs lower than the cost of production; controlling the prices at which oil and coal are sold to energy producers, thereby reducing profits of entities such as ONGC and Coal India; making banks waive off loans to farmers; having outdated labour laws, etc are all reflected in the low earnings multiples of government-run entities.
If the EPFO invests in such entities, the fund will not even get market returns and if the market delivers negative returns, the fund will suffer substantially.
Therefore, the EPFO is better off remaining in bonds where the government can at least print money to pay back bondholders.
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