Pension funds are allowed to invest in overnight mutual funds under NPS

Pension funds managing the National Pension System (NPS) can now invest in overnight and short-duration mutual fund debt schemes. The Pension Fund Regulatory and Development Authority (PFRDA) announced this in a circular last week.

According to the circular issued on November 20, 2019, “It has been decided by the Authority to allow pension funds to invest in overnight funds and all such short duration funds as may be permitted by SEBI from time to time for investment of surplus funds for short term investment, under the category ‘Short-term debt instruments and related instruments’ of Investment guidelines for NPS schemes issued by the Authority.”

Why pension funds are allowed to invest in overnight funds, short-duration funds

Earlier pension funds parked the investment proceeds pending deployment in the respective NPS schemes (usually for 1 day) in liquid mutual fund schemes instead of keeping the same in the bank account, ensuring that there was no loss of interest during the investment period. During this period, the investment in liquid funds was allowed to be redeemed at any time without the charge of exit load.

A PFRDA official said, “Since, recently, SEBI has come out with guidelines for the introduction of exit load on redemption of units in liquid funds within seven days of investment, the investment in liquid funds has become unattractive for short duration investment. Hence, pension funds have been given additional investment options such as overnight funds, which can be utilised for parking of funds/investments for short horizons. This has been done to ensure that returns of the subscribers do not get impacted negatively.”

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Are overnight funds a secured option for pension funds to invest?

Overnight funds carry negligible risk, no exit load at the time of redemption and hence can serve as a good option for pension funds to park a huge sum for a short time.

A PFRDA official said, “Overnight funds are open-ended debt mutual fund schemes investing in overnight securities with a maturity of one day. This makes them the least risky among the debt mutual fund categories and considering the investment pattern they are relatively secured instruments.”

The PFRDA circular also states, investment in units of overnight funds and short duration funds as may be permitted by SEBI from time to time with the condition that the average total asset under management of AMC for the most recent six-month period should be at least Rs 5,000 crores.



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