Government opens way to private provident fund to beat inflation (Lead)

August 15th, 2008 - 1:15 am ICT by IANS  

New Delhi, Aug 14 (IANS) Private provident and other retirement funds will be allowed to directly invest up to 15 percent of their investible funds in the capital market, giving fund managers a greater degree of flexibility. A finance ministry notification Thursday also announced easing of other existing norms. These investment pattern norms were last revised Jan 24, 2005.

The new norms will come into force from the next fiscal starting April 1, 2009, it said.

The new norms have been finalized after taking into account feedback received on proposed norms that had been put up at the finance ministry website last September.

The notification said that provident funds, superannuation funds and gratuity funds can now “directly invest up to 15 percent of their investible funds in shares of companies on which derivatives are available on the Bombay Stock Exchange and the National Stock Exchange.”

“This is a very healthy sign because in inflationary times, when the rate of interest is below the rate of inflation, then provident funds which are guaranteed return funds become guaranteed risk funds,” Naresh Pachisia, managing director of leading securities manager and mutual funds distributor SKP Securities Ltd, told IANS.

“So if these funds can invest in equities which can provide a high rate of return then the overall returns on the funds can be maintained at a rate higher than the inflation rate,” he explained.

“The 15 percent ceiling also seems just right because even if the equities investment goes wrong, the total capital is still protected,” Pachisia said.

“If the fund loses, say, at the most by 50 percent, then 7.5 percent of the total funds will be lost. But it will earn at least 9 percent on the 85 percent that it will be forced to invest on debt instruments.

“Since 9 percent of 85 percent is 7.65 percent of the amount invested, it will cover the possible loss of 7.5 percent,” Pachisia explained.

The other norms announced are aimed at giving the fund managers “greater flexibility in terms of a wider variety of financial instruments as well as greater freedom to actively manage the portfolio,” the notification said.

Highlight of the new norms:

* Central and state government securities and units of gilt mutual funds have been merged into a single category and trustees can invest up to 55 percent of the investible funds in them. Earlier, they had to invest 40 percent in central and state government securities only, and at least 15 percent in state government securities;

* A flexible ceiling has been provided for various instruments instead of fixed investment ceiling as at present;

* Providing new instruments, such as rupee bonds of multilateral funding agencies and money market instruments;

* Permitting investment in term deposit receipts of not less than one-year duration issued by commercial banks subject to specified criteria.

* Fund trustees can exit from a rated financial instrument when their rating falls below investment grade, as confirmed by one credit rating agency;

* The trustees can indulge in trading of securities provided the turnover ratio - the value of securities traded during the year, divided by the average value of the portfolio at the beginning and end of the year - does not exceed two;

* Trustees will be required to conform to the investment pattern norms only by the end of the financial year, although they are expected to do so throughout the year.

* Trustees can exceed the investment ceiling up to 10 percent of the limit prescribed during the year.

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