NEW DELHI: The Employees’ Provident Fund Organisation‘s decision to invest 3% of fresh annual accretions in Sebi-regulated category 1 and category II alternative investment funds (AIFs) might increase its already high returns from equity investments further, but that potential might come with greater uncertainty. This is because returns from these investments can be uneven, and capital may remain locked in for several years. Early performance may not reflect the eventual investment outcome. Typically, EPFO remains invested in asset classes it chooses for longer tenures.
The investment in these high-growth asset classes and startups will be within the existing framework that permits up to 5% of fresh accretions in asset-backed and trust-structured investments.
For safeguards, the EPFO’s proposal includes minimum fund-size requirements, limits on exposure to individual funds and underlying companies, and requirements relating to manager independence.
Experts say EPFO’s investments is AIFs should complement, not displace, its core responsibility: safeguarding subscribers’ retirement savings and meeting its liabilities. Sagar Nishar, co-founder and chief investment officer of Aurrevia, an AIF, says if selected and managed well, AIFs could diversify the portfolio and contribute to long-term investment income. “For subscribers, the impact is unlikely to be immediate as cash realisations may emerge over several years.”
AIFs typically have multi-year fund lives, limited redemption rights and restricted transferability. Returns depend on the fund manager’s sourcing and portfolio construction and the exit routes depend on the underlying strategy. “Private businesses are not traded daily on exchanges, so their carrying values are assessed periodically and may differ from the price realised at exit,” says Shrikant Goyal, managing director, Getfive Funds.
The EPFO invests in government securities, debt instruments and listed equities, largely through exchange-traded funds. An allocation to AIFs would broaden that opportunity set by providing access to private-market investments not available through conventional instruments.
Category I funds back startups, small businesses and infrastructure and category II funds cover private equity, private credit and real estate. In fact, AIFs can generate higher returns than traditional debt instruments over a full investment cycle, particularly through successful private equity and venture capital investments.
The management fees of AIFs vary by strategy and fund size which may range between 1.5% to 2.5%. “They also take a share of profits, often around a fifth, once investors have earned an agreed minimum return,” says Nitya Yadav, lead, Platform Strategy Architect, Integrow Asset Management.
As of March 2025, the EPFO’s total investment corpus was Rs 28.37 lakh crore. Of this, 14.9% was in central government securities, 43.5% in state development loans, 20.26% was invested as corporate bonds (public and private), and 10.04% in ETFs, among others.
The EPFO’s Central Board of Trustees recommends an annual interest rate after reviewing the investment income, accumulated surplus and liabilities, subject to the government’s approval. For FY 2025-26, EPFO had declared an interest rate of 8.25%, which remained unchanged for the third consecutive year and was the highest among other fixed-income and tax-saving avenues.
Source: The Financial Express
