PFs Stuck on Beaten Path, Miss In­vest­ment Wind­fall

New pat­tern, which al­lows greater flex­i­bil­ity in high-yield­ing debt, is wait­ing for govt nod

The Economic Times - - Markets & Finance - SAIKAT DAS

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.

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