According to the proposals, non-government provident, pension and gratuity funds can invest up to 15 per cent in shares of companies that have derivatives or in mutual funds.
As much as 15 per cent can be invested in exchange traded funds, index funds that replicate the portfolios of the Sensex or Nifty, or derivatives including credit default swaps.
The funds will be permitted to invest up to 40 per cent in government securities.
As per existing norms, such funds cannot take any direct equity exposure. With regard to debt instruments such as government bonds, the current exposure limit is 55 per cent of the total funds.
Retirement fund body EPFO is allowed to invest up to 5 per cent in money market instruments, including equity linked schemes of mutual funds regulated by the Securities and Exchange Board of India.
However, worker groups including the Bharatiya Mazdoor Sangh (BMS) and the All India Trade Union Congress have decided to oppose any move to allow the Employees' Provident Fund Organisation (EPFO) to invest part of the over Rs 5 lakh crore it holds in the equity market.
"Earlier, we opposed any investment by EPFO in the equity market. We will oppose it again as it is poor workers' money," BMS All India General Secretary Virjesh Upadhya said.
According to the draft proposals, index funds replicating Sensex or Nifty portfolios should be constructed "in such a manner that investment in securities may be in the same weightage comprising an index."
The fund managers will have to choose which index they intend to track in advance on a yearly basis, it added.
Retirement and gratuity funds will also be allowed to take an exposure of up to 40 per cent in debt securities with a maturity period of three years, infrastructure debt funds, term deposits of not less than one year and debt mutual funds regulated by Sebi.
The draft proposes to make the investment guidelines effective from April 1, 2015.
The Finance Ministry has suggested certain filters to minimise market risks. It proposes that fund managers should invest in mutual funds, ETFs or index funds directly so that the double incidence of cost is avoided.
If an instrument falls below investment grade confirmed by one agency, the option to exit should be exercised in the interests of subscribers.
Comments on the proposed modification in investment norms may be sent up to July 21.