The regulator has specified sectoral caps and limits on the amount of funds invested under the asset class E, which has a maximum exposure of 50% to the equity market. According to the new guidelines, funds under scheme E now have an investment exposure limit of up to 15% of pension fund managers’ equity portfolio to any particular sector.
“Investment in any equity stock of a sponsor group shall be restricted to 5% of the paid-up capital and 10% for a non-sponsor group company,” stated the circular.
Of the three schemes of NPS – C,G and E – the asset class E that has the maximum exposure will be invested in shares of the companies listed on the BSE or the NSE where derivatives are available or are part of benchmark indices. This means pension fund managers are allowed to invest directly in equity instead of index funds created by mutual fund (MF) managers. The new rules also allow fund mangers to pick up stocks from a basket of 149 eligible ones.
The change in guidelines related to investments in equities provides much elbowroom to pension fund managers to generate higher returns, believe experts. “In terms of asset allocation, I believe that investing in equities directly or through index funds does not make much of a difference to returns and risk objectives. The better-managed active funds in India have generated higher returns than passive index funds and to that extent, it will provide higher returns,” said a CEO of a domestic MF house, which also acts as one of the six NPS managers in India.
Asset class G invests a major chunk of the fund in state and central government bonds. Similarly, scheme C would be invested in credit risk bearing fixed income instruments. “This option will make the product more competitive as there will be variants in terms of performance by fund managers. This will give leeway to fund managers to adopt an alpha strategy,” said a senior pension fund manager.
Contrary to fears in some circles, the revised guidelines permitting NPS managers to invest directly won’t lead to any substantial increase in risks, given that the guidelines mandate restrictions on securities and sectoral limits. The PFRDA also brought out a roadmap for all private pension fund managers for investing directly in the equity market.
The managers are not allowed to invest in any of the initial public offers (IPO) and follow-on public offers (FPO). Even unlisted shares of companies stay off-limits. In case deployment of funds in any of these schemes is pending, those funds are allowed to be invested in short-term deposits of commercial banks, call deposits and short-term money market instruments with an investment ceiling up to 10% on temporary basis.
NPS, a low-cost pension product with three different schemes based on the exposure to equity and fixed income instruments, was set up in 2009, but due unfavourable distribution incentives, the product did not quite take off as expected. As per the data released by the PFRDA, total number of subscribers covered under NPS stands at 44,93,589 crore as of first week of March 2013. Last November, the regulator has allowed to hike the expense ratio, or the distribution cost of the product, to 0.25% from 0.0009%.