PFs Stuck on Beaten Path, Miss Investment Windfall
New pattern, which allows greater flexibility in high-yielding debt, is waiting for govt nod
Nearly 3,000 standalone provident funds have missed investment opportunities in high-yielding debt securities over the past few months since they have been following the old investment pattern since 2004 that is supposed to change soon.
The new pattern was expected to be notified by March-end after a bit of dilly-dallying, but later it was further postponed due to the Election Commission’s model code of conduct that was in place till May 16.
Such trusts are now looking to the new government, which is likely to give the final nod for notifying the new pattern that entails greater investment flexibility. The Employee Provident Fund Organisation (EPFO) had issued the new pattern in December 2013. “Due to lack of clarity, all exempted PFs are investing as per the old pattern,” said Nikhil Kakodkar, vice-president, Darashaw & Co, a Mumbai-based broking house dealing in provident funds. “Consequently, they have missed attractive levels for investing in debt securities for the past few months. Had the new pattern been notified in time, they would have gained (returns) significantly by now.”
Unlike EPFO, standalone or exempted PFs manage retirees’ funds individually. They invest about .` 17,000-20,000 crore yearly in debt instruments, according to a market estimate. At present, their total corpus stands at about .` 1.80 lakh crore.
The ministry of labour has approved the new scheme, which is currently pending for clearance from the finance ministry, a per- son with direct knowledge of the matter told ET. “The finance ministry will soon notify the new pattern for those PF trusts. It’s likely to be almost the same as in EPFO, but a small trading option may not be incorporated,” said the government official, who did not wish to be identified.
The new scheme has removed limits for investment in central or state government bonds that was mandated at minimum 25% for central and 15% for state categories in the earlier pattern. This will allow the PF trusts to invest in any of the categories as per their risk-return preference.
A PF investor now has the option to completely invest funds into state government securities or bonds known as state development loans ( SDLs) from a minimum 40% to a maximum 55% marked for all government securities. SDLs offer higher 40-50 basis points higher returns than the central government bonds. One basis point is 0.01%.
For example, 10-year SDL yields, which move inversely to prices, were quoting at about 9.68% on March 3 semi-annually while the rate was as high as 9.84% on February 25. These are now quoting at 9.13% in the secondary market, suggesting a sharp appreciation of investment values with falling yields by 55-71 basis points. “Yields have significantly fallen over the past two months, but the old pattern did not allow exempted PFs to take full mileage from it,” said a senior official from another Mumbaibased brokerage firm that works mainly
The new scheme has removed limits for investment in central or state government bonds
with these fund trusts. Moreover, the new scheme has merged two categories: public sector units (PSU) and private sector bonds. So, a PF trust can now invest from a minimum of 40% to a maximum 55% in a single category or both together. For example, the AAA-rated 10-year corporate bonds issued by the Housing Development Finance Corporation (HDFC) have also seen yields falling 40-50 basis points over the past two months. However, yields have contracted 30-40 basis points for PSU bonds of similar maturity.