RISING RATES SPELL GOOD NEWS FOR PFs

Mumbai: The Reserve Bank of India’s (RBI) move to hike interest rates may have spelt doom for bankers and borrowers, but for pension fund managers, this could prove as a windfall.

Most corporates, who were considering to shift their employees’ pension fund management to the Employees Provident Fund Organisation (EPFO), are now showing greater inclination to manage it themselves.

The reason being that they are able to pocket returns in excess of the mandatory 8.5% that the EPFO offers by investing in short-term securities during a rising interest-rate scenario. These include investments in treasury bills, gilt funds and bank fixed deposits.

In the case of corporates, even if they earn a yield in excess of 8.5%, they are not mandated to pay their employees a higher yield. In most cases, they may choose to park these surplus funds in the form of reserves, which may serve as a back-up as and when yields begin to dip.

Thus, the conservative provident fund manager is slowly displaying a touch of dynamism. Fund managers are realising the need to tap short-term securities to make the most of a rising interest-rate scenario, leaving plans to scout for long-tenure options for the later part of the year. More passive of the lot, few managers are also parking funds in oil and food bonds instead of dated government bonds, to avail of a higher yield.

Officials from the industry point out that since this is still the beginning of the financial year, PF managers feel that there is lot of opportunity to churn portfolios now and realign them in line with the mandatory norms. The recent rate hike moves made by RBI have caused short-term yields to supersede the yields on longer-tenure bonds.

Given the upward pressure on short-term interest rates, coupons payable on commercial papers and certificates of deposits have also turned into double-digits. This has prompted several gilt funds to shift to these instruments, in a bid to maximise returns.

When government bond yields begin to fall, these short-term gilt funds begin to invest in other short-tenure options to prevent their returns from turning negative. Fixed deposit schemes of banks also shot into the limelight much recently, wherein too rates have crossed the 10% level.

A senior industry official says that it will be more worthwhile for fund managers to invest in a fixed deposit scheme offered by a bank, yielding around 9-10% rather than locking funds in a bond issued by a public sector entity offering a yield of 9.4% for a longer duration.

Given the bearish sentiment in the market, it could well be that corporate bond yields may cross the 10% level after a few months, which is when the PF could reinvest funds in similar securities. Much of this action, say sources, is being driven by firms acting as advisors to retirement funds or else, fund managers who are well-aware of the rate situation.

According to a senior official from an advisory firm, most PF managers are now also wary about the EPFO coming under pressure to hike rates beyond the traditional 8.5%-mark. This could come on the back of political compulsions, in the wake of spiralling price levels.

PFs are mandated to invest 25% of the net accretion of funds in a year in central government securities. They could alternately invest this portion of funds in gilt funds also. Further, 15% of the funds need to be invested in state government bonds or bonds guaranteed by the state government.

Source: Economic Times