The PFRDA guideline on 5% cap on equity mutual fund investment by pension funds will be applicable to all NPS schemes—central and state governments, private sector, NPS Lite and Atal Pension Yojana.
In order to prevent pension fund managers from investing a large sum of money in equity mutual funds, Pension Fund Regulatory and Development Authority (PFRDA) has put a cap on equity mutual fund investment at 5% of the total corpus. The pension fund regulator has issued a circular last week which outlines the change in investment guidelines for National Pension System (NPS) regarding investment in equity mutual funds by pension funds.
“It has been decided by the authority to put a limit of 5% on investment in equity mutual funds in a manner that the aggregate portfolio invested in such mutual funds shall not be in excess of 5% of the total portfolio of the fund at any point in time and the fresh investment in such mutual funds shall not be in excess of 5% of the fresh accretions invested in a year,” says the PFRDA’s circular.
Equity investment norms
The regulator has decided that the amount of investment in any mutual fund mentioned in any of the categories or exchange traded funds or index funds made by pension funds through professional fund/asset managers shall be excluded for the purpose of computing their investment management fee.
While investing in mutual funds or index funds or exchange funds, the underlying scrips will have to comply with certain norms. The shares of the companies should have market capitalisation of not less than Rs 5,000 crore as on the date of the investment and derivatives of the underlying shares should trade in either of the two exchanges. The investment guidelines will be applicable to all NPS schemes —central and state governments, private sector, NPS Lite and Atal Pension Yojana.
Save on fund management charges
The investment guidelines of PFRDA dated June 3, 2015 and May 4, 2017 mention that if the pension fund has engaged services of professional fund/asset managers for management of its assets, payment should be made on the basis of the value of the funds invested. Experts say the PFRDA’s circular bring in clarity and will save investors from paying double incidence of cost; first as investment fee charged by pension fund manager and second, the expense fees to be paid to mutual fund companies.
Experts also say that pension fund managers levy an investment fee of 0.01% of the investment corpus. As a result they are not able to do active fund management and rely on mutual funds. After the circular, pension fund managers will now have to develop in-house asset managers to manage the investment corpus. At present, NPS has a total of eight pension fund managers.
Higher equity investment in NPS
Private sector subscribers of NPS can now invest up to 75% in equity under the active choice option. It is an option where the subscriber decides his asset mix. It was fixed at 50% since NPS was opend to private sector subscribers in 2009. Higher equity exposure will benefit young investors with a long working life as equity tends to give higher returns over a longer period of investment.
One can even opt for the life cycle fund where the equity exposure come down as one grows older.
The pension fund regulator had introduced two more life cycle funds apart from the existing moderate life cycle fund (with 50% equity cap) for private sector investors in auto choice. The two were: Aggressive life cycle fund (LC 75) with 75% equity cap and the other, conservative life cycle fund )LC 25) with cap on equity at 25%.
As investing for pension is typically for 30 to 35 years, it makes sense to invest in equity for higher returns. The G N Bajpai committee report on review of investment guidelines for NPS submitted worked
out a simulation model which shows rejigging of portfolio from 10% equity plus 50% government debt plus 40% corporate debt to 50% equity plus 25% each for corporate and government debt will increase the pension wealth by 46% after three decades.
The regulator’s decision to cap equity investment through mutual funds at 5% will help investors to save on costs, especially younger investors who would prefer a higher equity exposure.