The finance ministry’s proposal to allow private provident funds (PFs), superannuation funds and gratuity funds a greater exposure to equity and market-linked instruments has been cheered on by market participants. However, the ground reality is completely different.
Interestingly, very few of the funds allowed to invest in equities have even utilised their cap of 5%. According to various industry experts, even those funds, which do invest in equities, have an exposure of only 1-2%. Further, with the recent spike in bond yields, government securities as well as corporate bonds have been giving returns of over 9%. This is well above the returns of 8.5% which these funds are supposed to guarantee.
In a proposal made in September last year, the finance ministry had suggested a greater exposure for these funds, which manage the savings of employees of various corporates. It was mandated that these funds double their capital market exposure from 5% to 10% while reducing their exposure to government securities from 40% to 35%. A number of other changes in the investment pattern, including more exposure to money-market mutual funds and bonds or securities of PSU companies.
While market participants have welcomed this proposal, the general perception is that a number of other regulations need to change to make equity investments viable. The main bone of contention is that of the guaranteed returns of 8.5%. In case the fund fails to throw up an 8.5% return, the employers are expected to provide for the rest.
“The fact that these funds have to guarantee fixed returns while investing in instruments with variable returns did not find flavour with them,” said Amit Gopal, vice-president, India Life Capital, which manages funds for over 150 companies.
Whether these funds will actually take to the proposed relaxation in exposure norms remains to be seen. “It is highly unlikely that private provident funds or superannuation funds would actually take advantage of the relaxation in investment pattern, if and when it happens.
The basic risk appetite of these funds is completely different, even the bonds they invest in are top class bonds,” said a fund manager. In spite of having the expertise of huge treasury departments, banks and insurance companies that manage private provident funds have not invested heavily in the capital market, he added. At the moment, PF returns have been above the 8.5%-mark. Investments done in 2007-08, in particular, have given returns of over 9% while those of 30-year old trusts, which have been managed effectively, have consistently given returns of 8.5-8.8%.
Interestingly, very few of the funds allowed to invest in equities have even utilised their cap of 5%. According to various industry experts, even those funds, which do invest in equities, have an exposure of only 1-2%. Further, with the recent spike in bond yields, government securities as well as corporate bonds have been giving returns of over 9%. This is well above the returns of 8.5% which these funds are supposed to guarantee.
In a proposal made in September last year, the finance ministry had suggested a greater exposure for these funds, which manage the savings of employees of various corporates. It was mandated that these funds double their capital market exposure from 5% to 10% while reducing their exposure to government securities from 40% to 35%. A number of other changes in the investment pattern, including more exposure to money-market mutual funds and bonds or securities of PSU companies.
While market participants have welcomed this proposal, the general perception is that a number of other regulations need to change to make equity investments viable. The main bone of contention is that of the guaranteed returns of 8.5%. In case the fund fails to throw up an 8.5% return, the employers are expected to provide for the rest.
“The fact that these funds have to guarantee fixed returns while investing in instruments with variable returns did not find flavour with them,” said Amit Gopal, vice-president, India Life Capital, which manages funds for over 150 companies.
Whether these funds will actually take to the proposed relaxation in exposure norms remains to be seen. “It is highly unlikely that private provident funds or superannuation funds would actually take advantage of the relaxation in investment pattern, if and when it happens.
The basic risk appetite of these funds is completely different, even the bonds they invest in are top class bonds,” said a fund manager. In spite of having the expertise of huge treasury departments, banks and insurance companies that manage private provident funds have not invested heavily in the capital market, he added. At the moment, PF returns have been above the 8.5%-mark. Investments done in 2007-08, in particular, have given returns of over 9% while those of 30-year old trusts, which have been managed effectively, have consistently given returns of 8.5-8.8%.
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