Chennai: The pension fund regulator has put restrictions on the amount of money an asset manager can invest in equity mutual funds, taking cognizance of the fact that some of them had invested huge sums of money in these investment vehicles.
The Pension Fund Regulatory and Development Authority (PFRDA), in a 20 August circular, has capped investment in equity mutual funds at 5% of the total corpus. The rule will also apply to fresh investments. After permitting active management of the equity portfolio in 2015, the regulator also allowed pension fund managers to invest through mutual funds to offer them flexibility.
“We wanted to provide flexibility and an avenue for the fund managers to park the money while waiting for the right scrips," said B.S. Bhandari, whole-time member (economics), PFRDA. “However, some fund managers chose mutual funds as their investment strategy and invested huge sums of money. Being fund managers themselves, it’s incorrect to outsource fund management," he added. Mint had flagged this issue last year.
Of the eight pension fund managers that NPS (National Pension System) has, this move will primarily impact Kotak Mahindra Pension Fund Ltd (KMPFL) because it had invested its entire equity portfolio through mutual funds. According to the company, it has about ₹ 225 crore of assets under management under the equity portfolio.
“We have diluted about 50% of our mutual fund holding, but some mutual funds have an exit load, so we will wait for the exit load period to get over before redeeming the rest in the interest of the investors," said Sandeep Shrikhande, chief executive officer, Kotak Pension Fund.
The fund manager is now moving to invest directly in equities. While this strategy tantamounts to outsourcing fund management, it also means that investors pay extra costs of the mutual funds.
“Our focus has been to give superlative returns to the investors, and since asset management companies have the required skill set and capabilities we chose mutual-funds investments. Despite the costs, we were able to beat returns of other fund managers," added Shrikhande.
LIC Pension Fund Ltd had also invested a portion of its equity funds through mutual funds.
LIC Pension Fund didn’t respond to a query seeking comment.
According to the annual report for FY18 of LIC Pension Fund, it had about 11% of its equity corpus invested in mutual funds for the private sector and about 13% for the government sector.
As on 31 August, the fund manager had assets under management of around ₹ 455.79 crore in the equity portfolio of the private sector NPS. Its exposure to mutual funds has come down to less than 4%, according to portfolio disclosure of 31 August.
According to a chief investment officer of a pension fund company who didn’t want to be named, this circular will also impact some state-run pension fund managers as they had invested in Bharat 22 exchange-traded fund (ETF).