Many employees are relying on their investment in EPFO. Investment in EPFO can help an employee during their crisis times. To provide swift services, EPFO often updated their rules. In a major development, the Reserve Bank of India (RBI) has raised some questions over EPFO investment.
Why did RBI raise the questions?
Earlier this year, the Ministry of Labor approached the Reserve Bank of India (RBI). The ministry wanted the RBI to use its expertise to identify deficiencies in the EPFO’s investment strategy, fund management, accounting, and risk management. The ministry told the RBI that the EPFO lacks an independent regulatory mechanism, creating a potential conflict of interest because the EPFO both manages funds and regulates them.
The EPFO is under pressure to provide high returns to its millions of members. For FY2025, the EPFO announced an interest rate of 8.25%, while the average yield on 10-year government bonds was only 6.86%. This shortfall is being met by selling profits from equity investments. According to an expert, “Every year there is pressure to maintain and even increase returns for subscribers, even though bond yields have fallen well below that level.”
The RBI has advised the EPFO to make a major change to its investment strategy. Currently, the EPFO applies its asset allocation rules (how much to invest in which asset) only to new funds that come in each year. The RBI has stated that this approach is not correct. The organization should apply asset allocation rules to its total investments (outstanding stock), which is a better practice. The RBI also recommended adopting modern portfolio management, not limited to ETFs.
RBI officials have also cautioned about EPFO’s accounting policy. EPFO does not record losses from its bad investments nor does it make any provision for them. According to RBI, “Although returns from bad investments are not included in the interest payment to subscribers, this policy is not correct.” RBI also said that EPFO’s investments are not marked-to-market, meaning they are not valued at their current market price.