Every salaried employee has to contribute a small part their salary to Employees provident fund (EPF). And get fixed interest rate in return. Interest rate 8.8% is fixed for this Financial Year 2016-2017.Employee Provident Fund Organization has to pay this fixed Return compulsorily to the investors, no matter what is the return organization is receiving. Due to this condition many a times EPFO could bear some losses.
To cure it from this situation EPFO has been permitted to invest in equity and equity linked instruments up to 15% of its collected fund. Permission has been granted since August 2015. EPFO is currently investing only 5% of its fund in equity. 5% of the Employees provident fund is equivalent to the amount of Rs. 7,500 crore. Till now this investment has been generated up to 12% return of approximately 12%, disclosed by the labor secretary.
Remaining 95% fund has been invested in Government securities and generated the return of about 7.5% to 8%..If capital market is giving such a good return to the Employees Provident Funds, this will help in increase the return to the employees.
EPFO is long term investment fund this feature of EPFO yield better return by investing in equity. In long-term equity is the surest way to beat the inflation and give better return.But Investors of the EPFO are worrying about the decision of investing in capital market because it is a general tendency that equity is more volatile market and there is a high risk in investing in capital market.
Data shows that the average inflation last year was 5.05% and Employees Provident Fund is a long-term investment instrument so it averages out the cycle of high and low inflation and gives better return.To earn more than the average return equity should be a part of almost every long-term investment. And Employee Provident Fund is a long-term investment avenue.
As of now Equity to debt portion of Employees Provident Fund is 10:90, and Employee Provident Fund is investing only 5% of its fund. In future this percentage can vary up to 15%. But to increase the equity base more than the range of 5% to 15% will not be the good idea. This will increase the risk to the fund.
Equity and debt cover the negativity of each other so it is better combination for every long-term investment avenues. The reason is Debt fund and interest rates are negatively correlated to each other, so when interest fall equity performs well and cover the loss portion of Debt fund and vice-versa. Pension funds also invest in the combination of equity and debt.