The Pension Fund Regulatory and Development Authority of India (PFRDA) has enabled corporate debt funds from the National Pension System (NPS) to invest up to 10 percent of their assets in debt with residual maturity below 3 years. Only higher maturity corporate debt was allowed previously. PFRDA has also enabled pension funds to invest up to 5 percent of their assets in debt ETFs such as Bharat Bond ETFs in public sector units. On July 14 two variants of it will be launched. In addition to these changes, the pension regulator has raised the overall allocation in some categories of pension funds to money market instruments in pension funds from 5 percent to 10 percent.
The changes to the investment guidelines will allow such funds to shift their portfolio maturity profile lower and also lower their interest rate risk. It can also improve cash flow in the funds. Pension funds have so far benefitted from a high maturity. The returns of corporate bond funds in Tier I NPS funds ranged from 10.4 percent to 13.9 percent over the past year (as of June 26), according to NPS Trust data, as interest rates fell. In the future, however, an increase in interest rates will also have the opposite effect on the returns from pension funds. PFRDA further stipulated that such short-term debt must be rated AAA by at least two credit rating agencies.
The amendments apply to corporate bond funds for all types of the NPS, such as central and state government plans, corporate plans, and all citizens model. In addition, PFRDA also raised the maximum limit for money market instruments in the NPS from 5 percent to 10 percent, including liquid funds. This hike applies to NPS (all citizens) Tier I and Tier II equity funds aside from NPS Tier I corporate and government bond funds but not to other plans such as central or state government.
A pension fund’s chief investment officer (CIO) welcomed the move but added that distinguishing new debt paper from debt paper acquired under the old rules would be challenging. The CIO also said that on condition of anonymity they already have debt instruments of less than three years maturity. This is because the rule of three years of maturity applies at the time the investment is made. Since then the maturity of such paper has decreased
