New Delhi, August 15: The massive cash balances that provident funds sit on every December-January, in the absence of central government securities to park them in, will be history. The new investment pattern for non-government provident funds as well as superannuation and gratuity trusts, notified by the finance ministry on Thursday, allows the funds to invest those idle balances in gilt mutual funds.
In 2007-08, the EPFO had kept more than Rs 10,000 crore idle, as per a recent audit report. Incidentally, EPF’s earnings for 2007-08 are, therefore, only enough to pay 8.25% interest compared to 8.5% paid in the year before. The finance ministry’s new investment guidelines, that will become operational from April 1, 2009, can rectify this, going forward.
The guidelines leave no room for provident fund managers to cite investment restrictions put in by government for lack of returns on the money put in by the 40 million organised sector workers as their retirement savings. Significantly, the new guidelines have also raised the cap on equity investments from 5% to 15%, besides expanding the universe of eligible stocks where the money could be invested.
Also included in the universe of investment options will be money market mutual funds, rupee bonds of multilateral institutions like the World Bank and term deposits of private sector banks. More importantly, for the first time, pension fund trusts have been given the freedom to actively trade their portfolios. This change from a regime where securities had to be held till maturity would usher in better returns as funds can react to market dynamics.
Another major change is a move away from stipulating rigid caps for different investment instruments, which will impart greater flexibility in making investment choices. The new pattern simply specifies overarching investment limits, within which trustees can choose.
While the bouquet of investment options has been expanded, trustees have been made more explicitly responsible for investment decisions. However, sections feel since India is yet to get professional trustee companies in place, the new options may remain unused as existing trustees may shy away from taking hard decisions.
While welcoming some of the changes, Amit Gopal, India Life Asset Management, which consults several company-run PF trusts, points out that the stiff new accounting standards for retirement funds make companies liable to make good any losses in the same year that they occur. “Therefore, trustees may not be keen to take risks, as they will face flak from both the employees and the company,” he said.
“Increasing the stock investment limit from 5% to 15% will remain only on paper. Investors would benefit only if trustees take a risk, which is unlikely to happen in the present scenario,” said a senior government official.
In 2007-08, the EPFO had kept more than Rs 10,000 crore idle, as per a recent audit report. Incidentally, EPF’s earnings for 2007-08 are, therefore, only enough to pay 8.25% interest compared to 8.5% paid in the year before. The finance ministry’s new investment guidelines, that will become operational from April 1, 2009, can rectify this, going forward.
The guidelines leave no room for provident fund managers to cite investment restrictions put in by government for lack of returns on the money put in by the 40 million organised sector workers as their retirement savings. Significantly, the new guidelines have also raised the cap on equity investments from 5% to 15%, besides expanding the universe of eligible stocks where the money could be invested.
Also included in the universe of investment options will be money market mutual funds, rupee bonds of multilateral institutions like the World Bank and term deposits of private sector banks. More importantly, for the first time, pension fund trusts have been given the freedom to actively trade their portfolios. This change from a regime where securities had to be held till maturity would usher in better returns as funds can react to market dynamics.
Another major change is a move away from stipulating rigid caps for different investment instruments, which will impart greater flexibility in making investment choices. The new pattern simply specifies overarching investment limits, within which trustees can choose.
While the bouquet of investment options has been expanded, trustees have been made more explicitly responsible for investment decisions. However, sections feel since India is yet to get professional trustee companies in place, the new options may remain unused as existing trustees may shy away from taking hard decisions.
While welcoming some of the changes, Amit Gopal, India Life Asset Management, which consults several company-run PF trusts, points out that the stiff new accounting standards for retirement funds make companies liable to make good any losses in the same year that they occur. “Therefore, trustees may not be keen to take risks, as they will face flak from both the employees and the company,” he said.
“Increasing the stock investment limit from 5% to 15% will remain only on paper. Investors would benefit only if trustees take a risk, which is unlikely to happen in the present scenario,” said a senior government official.
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