MUMBAI: India’s biggest pension fund isn’t the only conservative manager of public money now investing in equities. Standalone provident funds, which together manage about $16 billion in savings for their staff, have started buying exchange-traded or mutual funds as stocks continue to outpace all other classes of asset in yielding high returns.
Standalone retirement funds now invest 5-10% of their corpus in equities, a move that should help money managers offset the impact of falling returns in bond investments that are losing sheen. Provident funds are allowed equity and equity-linked exposure of up to 15% of their corpus, and the rest goes to debt securities, including central and state bonds.
"Standalone PFs have started investing in equity ETFs and large cap mutual funds as they seek to maintain the desired returns,” said Abhishek Kedia, director at Trust Capital. "Deployment would rise depending on their investing experience. Investors are gradually gaining confidence in this asset class, which they have never tried earlier," he said.
Trust Capital advises about 800-900 such entities, known as exempted provident funds in market parlance.
India’s apex retirement fund manager, the Employees Provident Fund Organization (EPFO), has already booked a profit of more than Rs 1,000 crore by selling some of its equity investments. Speculation is rife that the minimum cap may be raised selectively.
“Some of the exempted PFs too have booked profits in the past few weeks as the Sensex scaled new highs,” said Amit Gopal, senior vice-president, India Life Capital. “Gradually, the average investment level will rise to the maximum limit – 15% (from 5-10% now) as fund managers are gaining confidence with profits showing up.”
Gopal advises about 150 such standalone funds that together manage Rs 30,000 crore. In his investment experience, the average rate of returns has shot up to 9% compared with 8.2-8.4%. The additional notional profit should go the reserves, used when the return is less than the mandated levels, he said.
Provident funds are now mandated to yield 8.55% from 8.65% earlier. These funds have been struggling to generate desired returns as bond prices are in a free fall. Bond yields have surged more than 100 basis points in the past six months pulling prices down, with investors forced to book mark-to-market losses.