The decision, approved by the Cabinet Committee on Economic Affairs on Thursday, lifts a near nine-year ban and will provide these companies a level playing field with the private sector.
Information and Broadcasting Minister PR Dasmunsi said the decision would be reviewed after one year. The company boards will decide the guidelines, procedures and management control systems for investment in mutual funds in consultation with their administrative ministries.
The stock market could witness up to Rs 60,000 crore worth investments from cash-rich public sector undertakings, which are estimated to be sitting on over Rs 2,00,000 crore of surplus cash.
Three asset management companies run by public sector undertakings, UTI, LIC and SBI, are likely to get these inflows.
"We have been pitching for this permission for the last few years. The PSUs were investing with us till 1998, which was stopped following various issues. We welcome this decision," said AP Kurian, chairman, Association of Mutual Funds in India.
"Public sector units have huge cash, on which they get minuscule returns. They have a good opportunity to invest some of this money in liquid schemes or fixed maturity plans, which have given up to 10-12 per cent returns this year. The government may ask the state-companies to maintain a cap on their equity exposure while fixed income will get the biggest exposure," said an official of a PSU mutual fund.
Besides, under the government's New Pension Scheme, the three asset management companies have been permitted to manage the pension funds set up for central and state government employees who joined their service after 2003. The total size of this corpus is around Rs 1,700 crore.
At present, 60 per cent of the mutual fund industry's corpus comes from fixed income schemes, which invest in stable return giving instruments such as government securities and bonds.
Industry sources also indicate that with this decision, the industry might see big inflows into the fixed income schemes as companies prefer to invest in secured return giving instruments.