MUMBAI: Standalone provident funds have begun to reduce their stock exposure and book profits as equity indices hit record highs, raising concerns of stretched valuations in growth assets.
They are diversifying into fixed income instruments such as triple A bonds and higher yielding state government bonds even though returns are circumspect – yet safe.
There are about 1,552 such funds – known as exempted provident funds – with an estimated Rs7-8 lakh crore corpus which can invest as much as 15 percent of corpus in equities. Many funds nearly exhausted the limits through the bull run.
The rest has to be invested through a combination of government and top-rated corporate bonds.
are seeking to realise the windfall gains from equities particularly when debt papers are yielding low amid record low interest rate regime,” said Amit Gopal, Principal, Mercer, which advises many standalone provident funds.
“Now, safety is the top priority for provident funds, which are increasingly looking at top rated corporate bonds and state government debt securities,” he said.
Last Friday, the Sensex crossed the 60,000 mark for the first time. From the peak the stock market bellwether dropped more than one percent until Wednesday, tracking global and local cues.
Fund managers fully or partly exited their equity market positions leaving a small portion, which will take care of any further upside, if at all.
“Corporate bond issuances have of late risen substantially, giving opportunities to investors,” said Ajay Manglunia, managing director & Head Institutional Fixed Income at JM Financial. “Top-rated public-sector companies are finding favour with long term investors like pension funds, whose monthly inflows seems to have gone up with the reopening of the economy.”
Power Finance Corporation, Indian Railways Finance Corporation, National Highway Authority of India (NHAI), Rural Electrification Corporation, National Bank for Agriculture and Rural Development (NABARD) are some of the companies whose bonds are being bought by PF investors.
NHAI bonds with 20-year maturity offered 7.05 percent a few days ago. NABARD bonds yielded 6.92 percent with 15-year maturity.
A 10-year series from Power Finance Corporation may yield 6.95-7 percent. The proposed bond sale will be up for bidding this Friday.
Earlier, standalone provident funds known as exempted PFs used to invest in double-A rated debt securities. However, the fallout of a credit crisis following defaults from two large non-banking finance companies including IL&FS, an infrastructure conglomerate and Dewan Housing Finance (DHFL) made them risk averse.
“We are managing people’s life savings. We have little options but to exercise optimum caution,” said a fund manager.
Similarly, state government bonds, known as state development loans (SDLs) in market parlance, are yielding around 6.82 percent. Provident funds are supposed to generate 8.55 percent rate of interest.
An investor can earn about 60 basis points higher than the sovereign benchmark paper with the same perceived “limited risk” in SDLs.