Private PFs told to invest in equities

Non-government PFs would have to invest up to 10% of their folios in debt tools or MFs.

The finance ministry has made it mandatory for non-government pension funds to invest up to 5 per cent of their portfolios in equities.

A government statement said non-government pension funds would have to invest up to 10 per cent of their portfolios in debt instruments or mutual funds and up to 5 per cent in gilt funds.

It was not immediately known how much money will flow into the stock market following the ministry's decision. Overall, the annual inflow in the provident fund corpus is over Rs 10,000 crore. However, this is inclusive of funds managed by the Employees Provident Fund Organisation (EPFO).

The revised investment pattern for provident funds takes effect from the new financial year beginning April 1.

"The move augurs well for the stock market as it ensures the flow of long-term stable funds into the market," said Dara Mehta, a fund manager with brokerage Darashaw.

Funds will be allowed to invest only in investment grade instruments -- corporate debt, state government paper or equity shares.

They will also be able to exit from any instrument in the event of the rating of that particular investment falling below the investment grade (BBB). In the past, trusts had the option to invest up to 10 per cent in corporate debt paper.

The notification, dated January 24, was signed by UK Sinha, joint secretary, finance ministry.

PFs, superannuation funds and gratuity funds can invest not only in corporate debt but also in equity-linked mutual funds. The government has also reduced the amount to be invested in bonds and securities of public financial institutions from 30 per cent to 25 per cent.

These funds can now take a longer view and invest in term deposit receipts of public sector banks up to three years, from one year earlier.

Investment norms on central government securities (25 per cent), state government paper, and gilt mutual funds remain unchanged.

Funds have an additional investment avenue in terms of lending their huge government security portfolio in the collateral borrowing and lending obligation (CBLO) market issued by the Clearing Corporation of India Ltd.

The government has, however, capped the exposure of a trust to any individual mutual fund -- set up as a dedicated fund for investment in government securities -- at 5 per cent of the total portfolio at any point of time.