EPFO and its investments

EPFO and its investments

Subject: Economy

Section: Employment

The Employees’ Provident Fund Organisation (EPFO) has held a “preliminary discussion” on raising the cap for investments linked to equity from 15 percent of incremental flows to 20-30 per cent, to shore up returns for the distribution of interest income to its six crore active subscribers, officials said.

Employees Pension Scheme (EPS):

• It is a social security scheme that was launched in 1995.
• The scheme, provided by EPFO, makes provisions for pensions for the employees in the organized sector after the retirement at the age of 58 years.
• Employees who are members of EPF automatically become members of EPS.
• Both employer and employee contribute 12% of employee’s monthly salary (basic wages plus dearness allowance) to the Employees’ Provident Fund (EPF) scheme.
• EPF scheme is mandatory for employees who draw a basic wage of Rs. 15,000 per month.

How the EPFO invests its money?

The EPFO follows a very simple and by-the-book strategy when it comes to investing. As per rules, 85%of annual accruals are invested in debt and 15% in equities. 

• Debt investments: While choosing the debt instruments, the organisation has to make sure-
  • To invest in government securities in the range of minimum of 45 % and maximum of 65%.
  • Again, another 20% to 50% needs to be invested in listed debt securities issued by corporate entities, including banks and public financial institutions.
  •  Apart from this, it is allowed to invest in short-term debt or related investment upto 5%, considering underlying papers have a minimum rating of A1+ by 2 rating agencies registered by Sebi.

• Equity investments: This contribution was limited to 5% and then increased to 10% and eventually raised to 15% in 2017. The EPF invests only through the primary market. Equity related investments include:
  • Exchange traded funds based on Sensex, Nifty 50, Central Public Sector Enterprises (CPSEs) and Bharat 22 indices.
  • The remaining is invested in fixed-income assets like government securities, bank fixed deposits and private sector bonds.
  • Before 2015, EPF contributions were purely invested in fixed income assets.
  • Further the EPFO does not invest in shares and equities of individual companies

Employees Provident Fund Organisation:

• It is a government organization that manages provident fund and pension accounts for the workforce engaged in the organized sector in India.
• It implements the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952.
• The Employees’ Provident Fund and Miscellaneous Provisions Act, 1952 provides for the institution of provident funds for employees in factories and other establishments.
• It is administered by the Ministry of Labour & Employment, Government of India.
• It is one of the World’s largest Social Security Organisations in terms of clientele and the volume of financial transactions undertaken.