The Hindu Business Line : Insurance regulator in favour of PFMs using index funds

THE proposal that pension fund managers (PFMs) must start using index funds once the pensions sector is opened up has found support from altogether different quarters - IRDA.

The Insurance Regulatory and Development Authority has strongly spoken in favour of index funds, which it thinks would enhance returns over time.

A dearth of good investment options on the fixed-income side and the consequent need to identify suitable alternatives are being cited as the two main reasons that have prompted the regulator's views on the subject.

Index funds, which follow passive investment styles, are said to be relatively safer vis-à-vis funds that actively manage their equity portfolios. Unlike the latter, the index trackers do not try to outperform their benchmark indices; they only try to mirror them to the best extent possible.

A senior IRDA official told Business Line that index funds are likely to boost performance in a situation where multiple alternatives are provided by PFMs. He was obviously referring to the three options - safe, growth, balanced - that are expected to be worked out by each player.

In India, the index funds scenario is at present quite nascent, with practically all asset management companies focusing on actively-managed, growth-oriented schemes and not on index-based products. The number of index funds in the country is small as a consequence. Further, there is almost no variety as most schemes track one of the two broad indices, Sensex and Nifty. The average asset size is small when compared to diversified growth funds. There is only one fund house - Benchmark MF - that has taken index-related initiatives on a sustained basis.

The famed Oasis report had actually suggested the use of index funds in the context of pension reforms. The need for having an exposure to even international funds, which are somewhat stable, is underlined here. Further, some quarters feel that there could be certain `market inefficiencies' on account of inadequate information, insufficient disclosure norms and excessive transaction charges.

The regulator's belief is based on the crisis-ridden pensions sector, marked by increasing liabilities for the Government. The ratio of currently employed persons to retired personnel has been progressively decreasing.

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