EPFO investments in debt instruments may be halved

New Delhi: The labour and employment ministry will soon seek approval from the finance ministry to halve the investments of the Employees' Provident Fund Organisation (EPFO) in debt instruments to 10%, said officials.

The move, prompted by lower yields and insufficient supply of public sector bonds, could lead to an increase in the retirement fund body's investments in corporate bonds, which offer higher returns but are risk prone.

The current investment limits, as per the notified pattern of investment by the finance ministry for Category II, which includes debt instruments and related investments, is 20-45%.

A senior government official told ET that the proposal was approved by the central board of trustees (CBT), the highest decision-making body of the EPFO, at its meeting in November 2024.

"The labour ministry will send the proposal to the finance ministry this week following formal approval from the labour minister, who is the chairman of the CBT," said the official, who did not wish to be identified.

The official said that since the EPFO invests only in the bonds issued by public sector undertakings (PSUs), its portfolio managers are facing issues relating to availability of sufficient supply of bonds throughout the year and lower yields in such bonds compared to state development loans. If approved, the proposal can also boost the corporate bond market, said experts.

Tarun Garg, executive director, Deloitte India, said the EPFO's decision to invest more in the corporate bond market would encourage more corporate issuances and help step up the flow of funds in the market, deepening it further with increased liquidity.

However, he cautioned, "Considering corporate bonds overall carry a higher risk in comparison to bonds of PSUs, EPFO will have to carefully and diligently monitor the creditworthiness of the companies in which they invest."