Provident funds lap up secondary market paper

Provident fund (PF) trusts set up by corporates and public sector undertakings (PSUs) are migrating to investment in secondary market paper and mutual funds.

PFs of nationalised banks, on the other hand, reportedly prefer to transfer securities from the bank's own portfolio instead of exploring other better investment avenues, said PF mangers.

Falling interest rates have demonstrated the need for PFs to migrate to purchasing secondary market paper for better risk and asset-liability management.

"The secondary market offers larger choice of instruments and maturity profiles, which in the case of primary market securities is limited as there are only a few issues opened at any point of time, said Dara Mehta, managing director of Darashaw & Co. Most new issuances in 2003 in the corporate debt market have a maturity profile of five to seven years.

PF managers are advising their PF trusts to invest in secondary paper where yields are relatively higher, with longer maturity papers to match their liability profile.

"Maturity profile of the PF portfolio can be finetuned by selecting appropriate duration of security from the secondary market, which is normally skewed in the case of the primary market securities," Mehta said.

Primary market issues are continuously priced lower than their previous issues in recent times, considering the fall in interest rates.

Andhra Pradesh Water Resources Development Corporation's (APWRDC) primary issue offers 8.0-8.20 per cent return, against its secondary market yields at 8.15-8.20 per cent.

Similarly, the primary issuance of Tamil Nadu Electricity Board offered a coupon rate of 8.0 per cent, against secondary yields of 8.15-8.20 per cent.

In the same manner, Hudco's primary issuance closed at 6.90 per cent and many PFs invested in the primary paper even as secondary market yields on Hudco's paper were higher at 7.15 per cent.

PFs are generally adverse to investing in secondary paper or mutual funds.

Darashaw along with Tata Mutual Fund launched the Tata Gilt Securities Fund for the provident fund industry to fulfill the long term investment objectives. Allaying PF concerns over the ability to exit from funds, Tata MF's scheme allows PF trusts two 'put' options each year to take care of redemptions.