PFRDA tweaks rules for NPS schemes investment norms In August, Pension Fund Regulatory Development Authority (PFRDA) had come out with norms like restrictions on the amount of money an asset manager of NPS (National Pension System) schemes can invest in equity mutual funds. In an August 20 circular, the regulator had capped investment in equity mutual funds at 5% of the total corpus. Now, in a fresh November 2 circular, PFRDA has issued certain clarifications that would impact the earlier announced changes in investment guidelines for NPS schemes.

The new tweaks are aimed at clearing the air for pension funds who were caught in a bind while implementing the revised norms. Let us find out what’s new.

Okays Fee for Liquid MF Investment

In its August 20 circular, PFRDA said that it has been decided that the amount of investment in any mutual fund mentioned in any of the categories or ETFs or Index Funds made by pension funds through professional asset managers should be excluded for the purpose of computing their investment management fees. The thought behind saying this was clear: professional managers already charge fees. Pension funds should not charge any investment management fee for merely entrusting other managers with the money.

In its November 2 circular, PFRDA has clarified the investments made by pension funds in liquid mutual funds would not be excluded for payment of investment management fee. Accordingly, now pension funds would be eligible for payment of investment management fee for investments in liquid MFs. It is unclear why PFRDA has allowed pension funds to charge investment management fees for putting investors’ money in liquid funds, which are arguably one of the safest and cheapest avenues (comparable to bank FDs).

Also, PFRDA has said that pension funds, in order to protect the interest of pension subscribers, may continue holding of mutual fund units till they complete one year so that exit load is avoided. Typically, mutual funds charge a 1% (or even more) exit load on withdrawals happening under 12 months of MF unit allotment. In our view, such decisions should be left to the fund manager as they may have to sometimes take decisions in order to protect investors’ long term wealth rather than avoiding the exit loads.

Underlying scrips in ETFs, Index Funds

In its August 20 circular, PFRDA had said that while investing in MFs, ETFs, and Index Funds, the underlying scrips of these avenues should also comply with stipulations for investments in direct equities. This means the underlying scrips of those MFs, ETFs and Index Funds should have a market capitalisation of equal to or more than Rs 5,000 crore. Also, the underlying scrips should have derivative with shares as underlying traded in either of the stock exchanges.

The problem is that index construction is not in the hands of pension funds. So, MFs, ETFs or Index Funds built by tracking an index could have stocks of firms that do not strictly adhere to the above guidelines. This would mean that pension funds may have to avoid good products because a few underlying stock constituents did not meet the norms. In the latest November 2 circular, PFRDA has said that the matter is under examination and consideration. It will now share suitable clarity on the matter in due course.

PFRDA is regulating NPS, subscribed by employees of Govt. of India, State Governments and by employees of private institutions/organisations & unorganised sectors.


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Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. He can be contacted on