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Provident funds can invest more in equities

Provident funds can invest more in equities
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First Published: Fri, Aug 15 2008. 12 20 AM IST

Updated: Fri, Aug 15 2008. 12 20 AM IST
New Delhi: The finance ministry has relaxed investment rules for retirement funds, allowing them to invest more in equities, but the move is unlikely to result in large inflows into the stock market because the government organization that manages some such savings has said it will not invest in equities and, according to a fund manager, privately managed retirement funds will not do so unless other norms governing such employee savings were changed.
Relaxing investment rules will not introduce reforms, said Dhirendra Kumar, chief executive of Value Research, an independent mutual funds research firm. In this case, he added, privately managed retirement funds will still have to meet a minimum annual return requirement set by the government. That could make them shy away from equities which may involve a slighter longer term play.
NEW NORMS (Graphic)
The corpus of retirement funds or so-called provident funds in India is estimated at around Rs7.4 trillion. This covers around 80 million employees—effectively anyone who works for a government department or firm or private sector firm which employs more than 20 people. The retirement savings of government employees are managed by the Employees Provident Fund Organisation (EPFO). Other organizations can manage the retirement funds of employees but have to guarantee the same minimum return EPFO does—currently 8.5%. This is the return announced by EPFO over the past two years though the actual returns were lower, as reported by Mint on 24 July last year.
On Thursday, the finance ministry also allowed such funds to invest in money market mutual funds, and raised the ceiling on their investments in government securities and rupee bonds issued by multilateral agencies such as the World Bank.
Despite the magnitude of retirement savings funds, it isn’t clear whether these norms will result in significant inflows into these instruments.
Of the Rs7.4 trillion, EPFO manages Rs2.4 trillion across 45 million employees. EPFO will not allow its fund managers to invest in equity, said W.R. Varda Rajan, secretary, Centre of Indian Trade Unions (Citu) and trustee at EPFO.
While private sector employees can, under EPFO rules they have to make good any shortfall in case the returns on their investments are lower than EPFO’s.
The finance ministry’s announcement on Thursday increased the ceiling on investments in equities by provident funds to 15% of their corpus from the earlier 5% but restricted such investments to equity shares of firms where derivative trades are allowed on National Stock Exchange and Bombay Stock Exchange. This gives fund managers the choice of investing in around 228 firms.
According to Kumar, equities provide the best returns in long term. However, in a market that is headed south in the short term, a privately managed fund is unlikely to use the equity option as the employer will have to bridge the gap between the fund’s actual return and EPFO’s annual return.
EPFO’s corpus is invested largely in debt and bank deposits. About half the corpus is invested in the Union government’s Special Deposit Scheme (SDS). The interest rate on SDS, which is referred to as the administered rate of interest, has been frozen at 8% since 2002.
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First Published: Fri, Aug 15 2008. 12 20 AM IST