Index at last

The New pension System that has recently been announced by Pension Fund Regulatory and Development Authority (PFRDA) intends to use Index Funds to provide investors with equity exposure. The maximum equity exposure is capped at 50%. The maximum percentage of equity exposure of not that important. Whats important is that this bill has the potential to produce a large number of long term equity investors.

Indians tend to use long term debt portfolios ( eg LIC policies, PPF) to supplement the retirement corpus. Equity investment is either seen as an easy and quick way to make a lot of money, or as too risky an investment which should be avoided. For most of the existing equity mutual fund investors the fund selection depends on the schemes suggested by the salesperson, the current 'hot' funds or the NFO promising a fabulous return. Long term means usually1 year, and 3 years at the maximum. Even the so called investment experts used to proclaim 3 years to be safe time horizon for equity investments, at least till the early part of 2008. This bill in one stroke can change all that for a large number of Indians, who most of the time have no idea about the underlying instruments that are used in there long term investments, or simply not interested to know.

But I am most excited about the decision to use index funds to provide this equity exposure. In India the concept of Index Funds is at a very nascent stage. Though there are a number of index funds only 3-4 funds have asset size of more than a hundred crores. This is minuscule compared to the total AUM of the Indian MF industry. I am not sure why it is so. One thing I know that most of the investors are not even aware of the existence of such funds, just as most people are not aware of the existence of term insurance plans. No newspaper carries daily NAVs of index funds, index funds are rarely among the top three or top five funds of the month, and no investment planner recommends these funds on Indian media. Compare this to the US, where the Vanguard Total Stock Market Index Fund has an AUM of $77 billion i.e. almost Rs375000 crore and currently the second largest us equity fund.
Here, in a singe stroke PFRDA has launched Index funds into a higher level. This move has the potential to usher in a new era in the Indian investment scenario.