Mutual funds are now targetting provident funds to build up a larger asset base.

The rush to launch gilt plans follows the recent finance ministry notification that provident funds could now invest up to 70 per cent of their incremental accretions in dedicated gilt funds.

In fact, the asset management industry is actively canvassing support with PFs, explaining to them the benefits to shifting their incremental inflows with mutual funds.

Pankan Razdan, deputy CEO at Prudential ICICI said, "The idea of attracting more provident fund money has already caught on. It's not that provident funds did not invest (in MFs) actively. Now, however, we expect them to be more dynamic on this front."

Recently, Prudential ICICI has launched the Pru ICICI Gilt Fund for PFs. The scheme is scheduled to close on November 14.

Industry sources say that a couple of other fund houses have also finalised plans to launch similar plans and it is only a matter of time before corporate India takes to investing its retirement corpus in such schemes in a major way.

The asset management industry is of the opinion that provident funds will henceforth take up the issue of investment in gilt funds more seriously.

Not too many PFs, especially the smaller ones, have professional money managers working for them, and this is where MFs can make a difference, it is felt. Quite expectedly, marketing functionaries working for fund houses see this as a special opportunity.

Razdan adds, "The mutual fund will actively manage the portfolio of government securities, whose value will be marked to market on a daily basis."

Thus, a gilt fund will add the accrued interest on securities on a daily basis and the value of the securities will change depending on the interest movements.

Ram Gopal, chief investment officer, fixed income, IL&FS Mutual Fund adds, "It's going to be a big market for the asset industry, but provident funds are not going to jump in immediately. The inflow will improve gradually over the years."

He also added, "Most mutual funds manage gilts actively, thus it gives provident fund the advantage of earning higher returns."

Currently, most provident funds hold their gilt investments till maturity thus the true value of the investment is not known.

"I think there will more transparency as mutual fund investment is marked-to-market daily and the portfolio is disclosed completely," he added.

It may be mentioned that the notification specifically referred to a 25 per cent exposure to central government securities and/or units of MFs that have been set up as "dedicated funds for investment in government securities and which have been approved by the Securities and Exchange Board of India."

Additionally, it mentions a 15 per cent and a 30 per cent exposure limit to such avenues -- direct investments and through dedicated gilt funds. Distributors of investment products feel this opens up a new avenue for mutual funds.

It is believed that a number of borderline cases (particularly ones in the private sector) will look at gilt funds even more, now that the government has clarified its position.

Many large organisations, nevertheless, are considered more active than the smaller players when it comes to management of their provident fund money. So it is the second-rung outfits that are being targeted, sources said.