Debt fund managers don?t see a significant amount of provident fund money coming into money market mutual funds in the near term, despite the Employee Provident Fund Organisation?s (EPFO) decision to allow investment of up to 5% of incremental flows in money market instruments.
?At the moment, MFs are not actively scouting for EPFO money and it?s too early to say whether the new notification will significantly bring in money to the MF industry,? said Lakshmi Iyer, head ? fixed income & products, Kotak MF.
?Both parties (EPFO and the fund houses) will have to evaluate the anticipated benefits of doing business with the other. EPFOs will have to take into account factors such as expense ratio for investment into debt funds and returns expectations, since returns on open-ended funds are not fixed,? she added.
According to the new policy, EPFO can invest as much as 55% of its ?incremental accretions? in government securities (G-Secs) instead of the 40% stipulated earlier.
Under the same limit, they can invest in securities where the principal and interest is fully and unconditionally guaranteed by the Central government or any state.
The same limit can also be used to invest in units of mutual funds set up as dedicated funds for investment in government securities and regulated by Sebi. However, the exposure to mutual funds shall not be more than 5% of the total portfolio at any point of time.
Experts feel EPFO money managers may choose to park some amount of surplus cash in money market funds such as liquid funds depending on the expected yield movement.
High liquidity and expenses as low as 5-10 basis points on the assets invested are the two main advantages of investing in these funds, they said.
?Incremental money coming through EPFO is not likely to be a big amount in the immediate future. However, over a period of time, the new money coming in may make a difference,? said Dwijendra Srivastava, head -fixed income, Sundaram MF.
Market observers believe that the buy-and-hold strategy of EPFOs may help bring in stable money for mutual funds over the long term.
It is estimated that R3,000-3,500 crore comes in through private EPFO money managers every year. If the entire 5% of this money is invested through the mutual fund route, MFs stand to get an additional R150-175 crore annually.
Apart from mutual funds, some experts believe that EPFO investments in corporate bonds are likely to rise because investments in these instruments are now required to be rated by just one credit rating agency as opposed to two earlier.