Assets Allocation:

The investment pattern above should be followed as under:

• Fresh accretions to the fund and redemption amounts of investments made earlier should be invested as per the proportions specified above.
• Interest received under each category should be reinvested in the same category, without reference to the above pattern. More particularly, interest received on Special Deposit Scheme should be reinvested in the Special Deposit Scheme.
• To ensure safety of funds by disallowing investment in ‘risky' assets such as equities. Investment in public sector undertakings is seen by the government as safe compared to investment in private sector companies.
• To direct pension fund investments into channels desired by the government.

The asset mix was decided upon by the government because the policy-makers wanted individual savers to be able to ‘decide' how their funds were being managed. From the point of view of investors (employee-savers), they think that they have a definite control over their hard earned money, which is a good thing.

There are, however, two points of view to this. From the asset managers' viewpoint, the strict percentages of asset allocation prove to be a straightjacket. From the multiple fund managers' point of view, who vie for their piece in the pension pie, there will be tough competition. There should be more room for fund managers to commit their funds to the asset type of their choice to reap the maximum gains from the markets. There can also be a gradual change from one asset class to the other.

Given the nature of pension funds, it is best that a very large part of the funds (more than 95%) must be invested in equity. In the long-term (more than 5-7 years), the premium equity yields over debt interest has been established beyond any doubt. There can, therefore, be a very high equity exposure in long-term asset management. It is a peculiarity of pension funds. Investment in international equity will invariably give a much better risk-return scenario to the fund. However, as the maturity period approaches, it is advisable to consider safety over growth and shift to investment in debt. This is a very useful method of gradually shifting from equity to debt in the later stages of the investment period suggest analysts. In the last 10 years of the investment period (10 years before the employee retires), the asset mix should ideally shift from equity to debt. This should be a gradual shift, so that in the last year or half-a-year, the fund should end up holding 100% debt.

Let us now revisit the stipulated percentages of investment in government securities, corporate bonds and equity. There is a share for government securities in all types of investments even growth. Many fund managers wonder the utility of having government securities as an asset class for such long-term investments. One argument that supporters can come up with is safety of investment, which is saying that investments in equity and bonds, over an investment horizon of 30-odd years are not ‘safe' enough.

The only other reason one can think of is that the government does not want to lose a large captive market for G-Secs (see Table 3). And this thought is frightening because the government looks more concerned with carrying on its not-too-impressive fiscal policy rather than thinking about the growth of investment funds for savers.