The Pension Fund Regulatory and Development Authority (PFRDA) is considering offering subscribers of the National Pension System (NPS) an option to invest a portion of their accumulated corpus in alternative investment including private equity and venture capital. The initial cap being considered for such investment is 5 per cent of a subscriber’s corpus.
The proposed move, which is part of PFRDA’s attempts to widen the choice available to subscribers, would take it to hitherto uncharted territories for retirement fund investment in India. The option could be offered through a separate life cycle fund that the PFRDA is considering.
“We are constantly looking for more instruments to invest NPS funds. Among the proposal is to carve out a separate portion – a small amount of about 5 per cent – to be invested in alternative investment funds, including private equity and venture capital,” Chairman, PFRDA, Hemant Contractor told FeMoney.
If approved, the investments are likely to be made through established private equity funds and venture capital funds.
Private equity refers to unlisted shares which are not traded on stock exchanges. Private equity investors generally invest in established companies, while venture capital funds invest in start ups, and generally exit when the valuations are good through stock exchange listing or buyouts.
Contractor said that the move is being considered since such alternative investments could generate healthy returns. “Alternative asset classes have the potential to generate higher returns than other asset classes,” the PFRDA Chairman said.
He, however, said the option to go in for alternative asset classes would be the sole prerogative of the subscriber. “The subscriber will have the choice,” Contractor said.
Among the other proposal to widen investors’ choice, the pension regulator has recently suggested two new life-cycle funds – the ‘Aggressive life cycle fund’ with equity allocation of 75 per cent at age 35 and ‘conservative life cycle fund’ with equity allocation of 25 per cent at age 35. The proposal is awaiting government’s nod.
NPS presently offers only one life cycle fund where equity exposure is capped at 50 per cent at age 35. In life cycle funds, the equity and debt components get rebalanced with age with equity progressively reduced in favour of debt.
In a concept paper suggesting the two new funds, PFRDA had said, “It is perceptible that investor awareness towards the various financial products has grown to the extent where subscribers can decide the mix of asset class on pension fund and change the same as per its discretion.”