Calcutta, Nov. 26: Provident fund managers are wary of buying mutual fund units even after they obtained the approval of the Union labour and finance ministries for such investments.
More than half-a-dozen asset management companies have introduced ‘PF plans’ in the last couple of months, but provident fund managers say there’s one sticky issue that needs to be sorted out.
“The law says an exempted trust (as provident fund trusts are called) must obtain ‘prior approval’ of the regional provident fund commissioner to sell any security held by it.
“Should the law apply to investment in mutual funds — and there’s no reason why it shouldn’t — the trusts will have to obtain the commissioner’s permission to sell mutual fund units as well.
“In practice, these approvals are nearly impossible to obtain and this means we cannot invest in mutual fund units till the regulation is withdrawn or modified,” said the treasury manager of a large corporation.
PF trusts are required to invest their corpus in debt instruments and normally hold all securities till maturity. They hardly offload anything in the market or through negotiated arrangements because getting approval for sale is difficult.
“We have had to sell some securities in the past, and had a lot of difficulty getting the commissioner’s approval,” said another provident fund manager.
The regulation, however, is not widely known, even among provident fund managers, let alone mutual fund distributors and asset management companies.
To avoid having to sell any security, provident fund managers match the maturity of assets with their cash requirements.
If they need Rs 10 crore in March next year they would ensure securities worth that amount matured in February.
“But open-ended mutual funds do not have any maturity. We’ll essentially have to sell units to meet our cash requirements,” explained a PF manager.
Mutual funds have been pitching for PF money since long. Previously PF managers could not invest in mutual funds because the Union labour ministry, which governs all exempted trusts, did not allow them to do so.
“It was a strange anomaly. The Union finance ministry had long permitted provident funds to invest in gilt mutual funds (or such schemes that invest only in government securities).
“At long last, the Union labour ministry took notice of it and issued a clarification in September saying provident funds could invest in gilt mutual funds.
“But now this weird regulation on sale of securities is frustrating our efforts,” complains a mutual fund distributor.
Allowing provident funds to invest in mutual fund schemes creates a win-win proposition for both, say analysts.
Mutual funds are in need of long-term cash, which provident funds have in plenty, while for the latter, professional management of investments is paramount.