The Hindu Business Line : PF's investing horizon expanded

THE GOVERNMENT HAS broken fresh ground in broad-basing the type of assets into which the long-term savings of members of the provident fund can be parked. Its latest guidelines provide for these funds to take a limited exposure to corporate debt and equity instruments, term deposits with commercial banks and mutual fund units. As the principal promoter of the largest corpus of such savings — the Employee Provident Fund scheme — the Government has been under some pressure in recent times to offer returns similar to those earned in the past. But an interest rate environment that has changed dramatically has brought to an end the era of high returns on provident fund savings, for the time being at least. Compounding the problem of high expectations on returns is the phenomenon of consumer prices rising at close to nine per cent the last 15 years. The consumer prices for industrial workers are today five times more than what they were in 1986-87, the base year for the latest series of these numbers. If the provident fund is to secure for a subscriber a reasonable standard of living, post-retirement, one cannot fault him for expecting double-digit nominal rates of return.

In the event, the policy compulsions underlying the new guidelines are easy to see. The Government cannot impound these savings into Special Deposit Schemes through executive fiats and yet expect to remain immune to pressures from the people for a higher return on these savings. But the goal of securing higher returns on PF savings is strewn with many challenges. For one, the fund managers may have to follow an aggressive investment strategy of churning up the portfolio of both debt and equity instruments. A passive approach is unlikely to fetch good returns. The 100 BSE stock National Index has posted a compounded annual return of around 5 per cent in the last 10 years. Similarly buying and locking into corporate debt till redemption are also not going to pay any great dividends. But an aggressive strategy of frequent shuffling of portfolio is by no means an easy task requiring as it does skills in reading correctly the short-term swings in the bond market.

The extant arrangement for managing contributions suffers from a structural rigidity in that the investment decisions are concentrated in the hands of the Central Board of Trustees. Given its present size, there would be no counter party of corresponding stature to take an opposite view to the PF Trustees. The Government should address this issue now that it has liberalised the investment norms. It must create conditions for a large number of asset managers to come into business. The Government must actively encourage employers, especially those with large workforces, to set up their own autonomous trusts to privately manage these funds. A start can be made with public enterprises that do not have their own PF trusts. Only a dynamic inter play of a large number of participants with differing views on the future course of events and liquidity needs can a more vibrant market be created for both bond and equity instruments. The resultant asset price volatility provides higher returns for those with a long-term investment horizon such as the provident funds.

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