Private bonds earned highest for EPFO in last five years

Government securities remained consistently low between 8.2 to 8.1% in three years

The recent tweaking of EPFO investment norms to ensure that investment in private sector bonds gets a fillip is based on the huge returns that the existing investments have posted.

The returns from the investment in private sector bonds were higher than what investments in PSU bonds or government securities earned for the retirement fund manager between March 2009 to March 2012.

While government securities remained consistently low between 8.2 to 8.1% in the three years, PSU investment earnings were their lowest in March 2010 at 8.6% and highest at 9% both in March 09 and March 2012.

The private bonds on the other hand was almost consistently from March 2011 to March 2012 at 9.4%. It was at its peak in 2009 at 9.7 from where it slid down to 9.3 and then rose and remained consistent.

But in all the given years, the private bonds outshone the other investments, according to EPFO numbers.

And yet the amount invested in private bonds was the smallest of all.

While 68% was invested in Government securities, 26% was invested in PSU bonds, only six% was invested in private sector bonds.

The earnings recorded by the private bonds were an argument in favour of pushing more investments into them, say EPFO officials.

When EPFO commissioner Anil Swarup was asked how he convinced the trade union members about investing upto 40% in private bonds, he said : I just showed them the earnings and what EPFO subscribers were losing by not investing wisely..and they immediately agreed.

AITUC state secretary and member of the Central Board of Trustees the supreme decision making body of EPFO headed by Labour Minister said that the unions had nothing against bonds. We are only particular about keeping funds away from equities, he said.

The new norms approved by the Government and CBT allow investment of up to 40% funds in both PSU and private bonds.
Earlier there was a ceiling of 10% for private bonds. Now there is no ceiling except 40% which could have any combination of private and public sector bonds, officials say.

 As per the new guidelines eight new entities will qualify for investments by EPFO in the private sector comapies category in addition to the existing entities. These are : ACC Limited, Grasim Industries, Great Eastern Shipping, Reliance Capital, Reliance Industries, Ultra Tech Cement, Larson and Toubro and Hero Motocorp ltd.
 
When EPFO had started investing in private bonds in 2006, it had picked seven companies on the basis of “discretion and logic” and got those approved by CBT. These firms were HDFC, IDFC, IL&FS, LIC Housing Finance, HDFC Bank, ICICI Bank and Axis Bank. Of these, only IL&FS is an unlisted entity. As per the norms now approved by the CBT, a company to qualify for investment must be listed, double triple A rated and worth of  Rs 3,000 crore.

Also, it should have declared at least 15% dividend for five preceding years and the maturity period of its bonds should be at least 10 years.

Asset allocation as on December 2012

<sup>Government securities: 68%

PSU bonds: 26%

Private bonds: 6%

Chart shows how private bonds have worked well for EPFO in the last five years though the smallest part of the total investments were made in them</sup>

Return on asset for last five years

	GSEC	PSU	Private
March 2009	8.20	9.00	9.65
March 2010	8.15	8.60	9.35
March 2011	8.10	8.80	9.45
March 2012	8.10	9.00	9.40
Post March	8.20	9.01	9.45

^{(Rate of Return on a scale of 7.50 to 10.00)}