Currently, minimum 35% and up to 45% can be invested in debt securities and term deposits of banks.
The government has reduced the minimum investment floor mandated for debt securities and term deposits of banks to 20% from the existing 35%. This means that EPFO now has greater flexibility in investing your EPF in debt. This move may be aimed at allowing EPFO to reduce exposure to risky corporate debt when investing your EPF money. The circular making this change was issued on February 23.
As per recent reports in the media, EPFO had requested the Centre to allow it to buy more state government bonds instead of allocating money into corporate bonds, which to them was a more risky debt paper.
Earlier, the government had allowed the EPFO to invest in AA-rated paper but the central board of trustees (CBT) decided to permit investments in instruments graded a notch higher at AA+.
Currently, as per the investment pattern last notified on April 1, 2015, minimum 35 percent and up to 45 percent can be invested in debt securities and term deposits of banks. This includes investments in corporate debt.
Current mandated existing investment pattern of EPF
In addition to government securities, debt securities (corporate bonds) and money market instruments, EPFO was allowed to invest in equity-related investments in 2015 for the first time. The mandate is to invest in exchange-traded funds (ETFs), index funds and derivatives with a minimum 5 percent and up to 15 percent limit for equity and equity-related instruments. The EPFO's central board subsequently permitted investment in ETFs based on the Nifty 50 and Sensex indices, with the first such investment made in August 2015.
And as of FY16, total investment in equity ETFs was Rs 6,577 crore. In FY17, it rose to Rs 14,984 crore or 10 percent of its investible amount. For the current fiscal, the investment limit was raised to 15 percent, which has translated into more than Rs 22,000 crore being invested in ETFs run by SBI Mutual Fund, UTI Mutual Fund and one ETF comprising central public sector enterprise stocks, called CPSE ETF.
According to some estimates, EPFO's equity investment has earned an annual return of over 13 percent, a notional gain until it begins liquidating holdings under its unitisation policy approved by CBT in November last year. This exceeds the 8.5 percent that its debt investments earn. As per the unitisation policy, gains on equity investments will be distributed to members in the form of units like mutual funds. Earnings on the debt component will be paid as interest.
