* To track MSCI emerging markets index
* Initial investment seen very small
* Will pick both active and passive managers
* GPIF's asset size $1.4 trln, bigger than India's economy (Adds details, analyst comments)
By Chikafumi Hodo
TOKYO, Oct 12 (Reuters) - Japan's public pension fund, the world's largest, will invest in emerging markets for the first time, albeit a small amount, in a baby step towards taking on more risk as it grapples with a huge shortfall and an ageing population.
The Government Pension Investment Fund (GPIF), which holds about $1.4 trillion in assets -- larger than the economy of India, is under pressure to increase returns but also to play it safe as more pension payouts loom, with 6.8 trillion yen due this financial year.
It will use the MSCI main emerging market stock index as its benchmark, and pick both active and passive fund managers in a tender that closes on Dec. 10.
"It's difficult to say how much we'll invest. We are not thinking of investing a large amount. We're just planning on small amounts," said an official with the fund, who declined to be identified.
The official said he was not sure how long the selection process for fund managers would take or how many managers the public fund would pick.
The GPIF is a conservative investor which keeps more than two-thirds of its assets in Japanese government bonds.
Analysts say that current pension recipients would prefer the GPIF to stick to safe assets, but the younger generation may want the GPIF to take more on more risk and pursue higher returns by investing in emerging markets, which could be more promising than simply investing in conventional assets.
"The problem is timing. The GPIF doesn't want to take risks over the next five to six years as it has to pay out cash for pension recipients. As such, the GPIF can't be allowed to book huge losses by investing in risk assets," said Takahiro Tsuchiya, a strategist at Daiwa Institute of Research.
As of June, about 9 percent of the GPIF's total assets, or 10.6 trillion yen out of 116.8 trillion yen, were held in foreign equities.
Tsuchiya said the GPIF may start investing about 100-200 billion yen in stock markets of emerging economies and eventually raise this to about 1 trillion yen in the long run.
The GPIF's portfolio target calls for a 67 percent allocation to domestic bonds, 11 percent to domestic stocks, 9 percent to foreign stocks, 8 percent to foreign bonds and 5 percent to short-term assets. ($1=82.05 Yen) (Reporting by Chikafumi Hodo; Editing by Edwina Gibbs)