Gilts take the shine off PFs

Waning G-sec prices are buffetting the NAVs of gilt funds.

If the company that you work for has a trust that manages its provident fund (PF), and if the PF invested in gilt funds, you face the prospect of losing some of your PF money "" unless the company covers some of the money your PF may have lost.

Faced with an erosion in the value of their investments in gilts funds, PFs of companies that manage their own PFs have written to the PF Commissioner, Employees' Provident Fund Organisation, asking who will have to bear the loss "" exempted PF trusts, which manage the corpus, or the companies themselves.

The erosion in the net asset values (NAV) of gilt funds has been triggered by the rising interest rates of gilts.

The yield on 10-year benchmark government paper, which was around 5.25 per cent a month back, has now shot up to 5.85 per cent. If the PF trusts have to bear the loss, the employees' corpus will be reduced to that extent.

Trustees of a multinational firm's PF trust told Business Standard that investments in gilt funds in the past month had shown a loss of about 2 per cent.

"PF trusts will need to make a provision for this loss as we require to mark-to-market our investments," said Amit Gopal, vice-president, India Life.

The mark-to-market norms require making good of even notional losses (even if there is no sale and booking of actual loss) for accounting purposes.

The mutual fund industry's gilts portfolio is over Rs 6,000 crore. However, it is not known how much is accounted for by the PFs.

When accounting for income, PF trusts recognise income in the case of fixed-income bonds on the basis of the coupon rate. This is accounted for on an accrual basis.

However, in the case of gilt funds, in the absence of a coupon rate, income recognition is based on the notional loss or gain in the NAV of the respective funds.

Mutual fund managers, however, do not see a major problem for the PFs. "The PFs are long-term investments. Any fall in NAVs should not worry the investors," said Sandesh Kirkire, head of debt funds at Kotak Mutual Fund.

However, with NAVs dropping, PFs are planning to exit from gilt funds. The trusts are not permitted to exit from investment in bonds without prior approval from the PF Commissioner's office.

Current norms allow PFs the exit option only when obligatory outflows exceed inflows and on the deterioration of the quality of issuers of bonds. The trustees now want to be exempted from the "prior approval" norm.