The Hindu Business Line : Falling yields give PFs little elbow room

Will the employee provident funds, with a total corpus of Rs 1,20,000 crore, be able to maintain the administered rate of return of 9.5 per cent? Several provident fund (PF) managers Business Line spoke to believe they might be able to pull along this year, but the year ahead looks gloomy.

This year, most PFs were banking on accumulated surplus and past investments yielding higher returns, conceded Mr A. Mahendra Raju, Regional Provident Fund Commissioner, Maharashtra, Employees' Provident Fund Organisation.

PFs which typically do not trade, but hold instruments to maturity, are finding their returns constantly dipping in today's falling interest rate scenario.

"With cash inflows every month, we buy Government securities at a premium, with g-sec prices scaling up day by day," said a PF manager in a large multinational. "Therefore, the interest rate we obtain from these securities works out to be lower," he added.

Another problem confronting the PFs is the recent trend of several financial institutions exercising the call option on their corporate bonds such as ICICI, Power Finance Corporation and Kerala State Electricity Board, to name a few.

"In such cases, we are left with no choice but to give up these old high yielding instruments. HMT is another one expected to exercise this option soon," said a PF manager of a large industrial house. Confined to the investment pattern specified by Central Government, PFs have to maintain a 40 per cent exposure of their funds to PSU bonds. "The AAA and AA bonds, which we invest in yield only between 6.25-9.00 per cent in today's scenario," said a PF manager.

These trusts also have to necessarily invest 15 per cent of their funds in the State Government and State guaranteed bonds. According to PF managers, there is a constant dread of default, late payments and threat of roll-over while investing in these. Several fund managers are exasperated by the cut in interest rate in the Special Deposit Scheme managed by the Central Government, in which PFs have invested heavily.

"Almost 60-70 per cent of funds of several trusts are still invested in the Special Deposit Scheme which currently yields 9 per cent, cut from 9.5 per cent. This half per cent has to be made up from some other avenue, in these difficult times," complained the fund manager of a pharmaceutical company.

What happens in the case of the trusts that are not able to generate the prescribed 9.5 per cent returns? "The management of the company will have to foot the gap," said the Regional PF Commissioner. Asked what would happen to the badly performing companies, he said, "Outsourcing the management of funds to a professional agency might be a good idea."

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