The Pension Fund Regulatory and Development Authority (PFRDA) in a circular last week announced that pension funds managing the National Pension System (NPS) can now invest in overnight and short-duration mutual fund debt schemes.
"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," the circular dated 20 November 2019 said.
Earlier, investment in liquid funds was allowed for pension funds to be redeemed at any time without exit load charges. The option was used by pension funds to park investment proceeds pending deployment in the respective NPS schemes for usually a day instead of the bank account. This was done to ensure no loss of interest during the investment period.
Recently, SEBI introduced exit load on the redemption of units in liquid funds within seven days of investment, making short-duration investments unattractive.
By permitting the use of overnight funds, which carry negligible risk and no exit load, pension funds will now have an additional option to park a huge sum for a short time.