Pension and provident funds are likely to be allowed to invest as much as 30 per cent of their corpus in equity markets with the finance ministry set to open up newer investment avenues for them including exchange traded funds and index funds.
According to the new investment pattern drafted by the finance ministry, non-government provident funds, superannuation funds and gratuity funds can cap their investments in government securities to 40 per cent from the current limit of 55 per cent.
“The investment norms of 2009 are proposed to be revised to include new financial instruments, like exchange traded funds (ETFs), debt mutual funds, infrastructure debt funds, covered bonds and asset backed securities and also allow instruments like derivatives for the purposes of hedging of risk in the cash market,” said a senior government official. Instead, these retirement funds that together have a combined kitty of over Rs 1 lakh crore will be permitted to invest up to 15 per cent of their funds in ETFs and index funds.
“It is a positive step forward by expanding the investment choices available to retirement funds and adding instruments to cover risk,” said Prasanna Deokar, vice president, India Life Capital that advises retirement funds. But he cautioned that the government is trying to force investors to enter the equity market to develop it.
The move is significant given that the Employees’ Provident Fund Organisation and private-run PF trusts refuse to even use the existing window for investing up to 15 per cent of their over Rs 50,000 crore corpus in shares of listed companies or equity-linked schemes of mutual funds.
Meanwhile, the proposed norms have retained the limit for investments in corporate bonds at 40 per cent but have sought to introduce a new sub-category of debt mutual funds that are regulated by Sebi.
The guidelines also seek to allow investments in derivative instruments for hedging and portfolio rebalancing as well as credit default swaps.
“The norms follow an announcement in Budget 2012-13 and will be effective from April 1, 2015, and will help improve returns for these funds as well as allow investments in newer instruments,” said the official, adding that companies would be a given a year’s time to implement the new pattern.
The department of financial services has also sought stakeholders’ comments on the norms that would impact investments by the EPFO, exempt PF trusts, uncovered trusts as well as gratuity and pension trusts run by insurance firms.