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7/29/2019 NPS A NEW LOOK
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Why new NPS could be the best way to save for retirement, 10.0 outof 10 based on 1 rating
Rating: 10.0/10 (1 vote cast)
The NPSschemes managed by the Kotak Pension Fund have churned out
terrific returns in the past one-year and three-year periods. All three tier I
funds of Kotak have been the best performers in their categories, but this
feat has gone largely unnoticed. The pension fund manager, too, is uninterested in
highlighting the spectacular 12.05% returns generated in the past three years by its C class
fund, which invests in corporatebonds. During the same period, the best medium-term
income fund churned out 9.2%.
This reluctance to tom-tom the performance is possibly because the pension fund managers
are losing money on every new NPS account. With a fund management charge of 0.0009%,
a pension fund manager gets Rs 9 for managing a corpus of Rs 10 lakh for a year. The
average mutual fund gets close to Rs 20,000 for the same job, while a unit-linked pension
plan charges almost Rs 30,000. "Such low charges are unsustainable and could force the
fund managers to shut shop," admits Pension Fund Regulatory and Development Authority
(PFRDA) chairman Yogesh Agarwal
This is poised to change. Fresh guidelines issued by the PFRDA have revised the structure
of charges of the NPS, which will make the scheme more remunerative for distributors and
pension fund managers. After the terms of the six pension fund managers expire in October
this year, new pension fund managers will be appointed as per the revised guidelines.
The upward revision of the fund management charges will remove a major bottleneck that
has prevented the spread of the NPS. Even after three years, the scheme has attracted
barely 46,000 voluntary investors. The bulk of its 24.27 lakh subscribers is central and state
government employees (16.2 lakh), for whom the NPS is compulsory, or the 7.4 lakh NPS
Lite investors, who got drawn by the Rs 1,000 government subsidy. Distributors are not
interested in selling the low-cost scheme because the commission earned doesn't justify the
effort.
Admittedly, the revision in charges will affect the returns of the investors. The
outperformance of NPS funds is chiefly because of the low charges of the scheme.
Agarwal points out that even though NPS charges will be raised, they will remain the lowest.
Also, the government will place a cap on the charges. "This cap could be in the region of
0.25% per year," he says. According to the guidelines, the fund management fee will include
all transaction-related charges, and all other costs shall be borne by the fund.
http://www.investmentkit.com/articles/tag/nps/http://www.investmentkit.com/articles/tag/nps/http://www.investmentkit.com/articles/2011/01/corporate-fds-not-necessarily-good-bets-than-bank-fds/http://www.investmentkit.com/articles/2011/01/corporate-fds-not-necessarily-good-bets-than-bank-fds/http://www.investmentkit.com/articles/2010/11/how-to-open-a-ppf-account-at-sbi-bank/http://www.investmentkit.com/articles/2010/12/shall-you-go-for-portfolio-management-services-pms/http://www.investmentkit.com/articles/2010/10/best-indian-mutual-funds/http://www.investmentkit.com/articles/2011/01/how-valuable-are-reward-points-of-your-credit-card/http://www.investmentkit.com/articles/tag/nps/http://www.investmentkit.com/articles/2011/01/corporate-fds-not-necessarily-good-bets-than-bank-fds/http://www.investmentkit.com/articles/2010/11/how-to-open-a-ppf-account-at-sbi-bank/http://www.investmentkit.com/articles/2010/12/shall-you-go-for-portfolio-management-services-pms/http://www.investmentkit.com/articles/2010/10/best-indian-mutual-funds/http://www.investmentkit.com/articles/2011/01/how-valuable-are-reward-points-of-your-credit-card/7/29/2019 NPS A NEW LOOK
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Investors have a different perception of the NPS
Agarwal is hopeful that after the new rulescome into effect, distributors will get a good
incentive to push the scheme, while fund managers will start marketing efforts to spread
awareness. In a marked departure from the past, pension fund managers will also be
allowed to work out distribution strategies and coordinate with distributors. However, critics
say this could open the sluice gates for mis-selling as the product manufacturer and
salesperson team up.
However, the resultant competition will help disseminate information about the NPS funds.
Hiren Dhakan, manager, research, Bonanza Portfolio, says he often advises clients to invest
in the NPS but is not able to pinpoint which fund manager to choose. "There is no publisheddata on how the funds are doing," he says.
The overhaul of the NPS comes at a time when pension products from insurance companies
have all but disappeared from the market. Pension plans accounted for 34% of the premium
from new policies sold in 2007-8. Last year, only 1% of the total new business came from
these products. This shift follows insurance regulator Irda's insistence that insurers give a
http://www.investmentkit.com/articles/2010/10/10-rules-to-select-right-mutual-fund/http://www.investmentkit.com/articles/2010/10/10-rules-to-select-right-mutual-fund/http://www.investmentkit.com/articles/2010/10/how-many-mf-schemes-you-should-have-in-your-portfolio/http://www.investmentkit.com/articles/2010/10/how-many-mf-schemes-you-should-have-in-your-portfolio/http://www.investmentkit.com/articles/2010/10/10-rules-to-select-right-mutual-fund/http://www.investmentkit.com/articles/2010/10/how-many-mf-schemes-you-should-have-in-your-portfolio/7/29/2019 NPS A NEW LOOK
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guaranteed return on these plans. "This drop is due to the change in the regulatory road
map," says Life Insurance Council secretary-general SB Mathur.
"It's ironical that insurance companies were not able to offer assured returns of 6% per
annum on products that their agents were selling with projections of 12-15% annual returns,"says Nirav Panchmatia, financial trainer and founder of AUM FinancialAdvisors.
Irda relented, but wanted insurers to compulsorily offer annuities. Annuities are investments
that provide a stream of income for the investor after his pension plan matures. While
insurers were offering the investment leg of the pension plan, not many offered annuities as
well.
At the same time, capital market regulator Sebi is nudging mutual fund houses to launchpension products. Fund houses have sought permission from the Finance Ministry to float
these, with Reliance Mutual Fund having sought approval for a pension fund.
Others may follow suit. "Given the expertise, choice, flexibility and transparency they offer to
investors, mutual funds have a natural advantage during the accumulation phase of a
retirement plan," says Vijai Mantri, CEO and MD of Pramerica Mutual Fund.
http://www.investmentkit.com/articles/2010/11/hire-the-right-financial-advisor/http://www.investmentkit.com/articles/2010/12/minimising-capital-gains-tax-2/http://www.investmentkit.com/articles/2010/10/best-indian-mutual-funds/http://www.investmentkit.com/articles/2010/12/is-this-the-right-time-to-buy-a-house/http://www.investmentkit.com/articles/2010/11/hire-the-right-financial-advisor/http://www.investmentkit.com/articles/2010/12/minimising-capital-gains-tax-2/http://www.investmentkit.com/articles/2010/10/best-indian-mutual-funds/http://www.investmentkit.com/articles/2010/12/is-this-the-right-time-to-buy-a-house/7/29/2019 NPS A NEW LOOK
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Even the fund houses that already have pension fund subsidiaries managing the NPS
schemes are enthused. "Mutual funds too can offer pension products, albeit at a higher cost
than the NPS. The more the merrier," says Sandesh Kirkire, CEO of Kotak Mutual Fund.
A couple of such mutual funds already exist, but these are not really pension products. Yourinvestments in the Templeton India Pension Plan or the UTI Retirement Benefit Plan will
fetch you tax benefits under Section 80C, but there is little to differentiate these funds from
any other scheme.
Their biggest drawback is that these funds give the investor more freedom than he needs.
He can dip into the corpus anytime after the three-year lock-in period. There's only a 2-3%
penalty if he withdraws before he turns 60.
NPS funds have done well in the past three years
This needs to be fixed. Experts point out that the average investor lacks the self-discipline
required for retirement planning. "Premature withdrawals should be discouraged, either with
steeperexitloads or a blanket ban on withdrawals before retirement. To soften the effect of
the ban, investors could be allowed to switch between funds and fund managers every five
years," says Mantri.
http://www.investmentkit.com/articles/2010/11/should-couples-keep-their-finances-separate/http://www.investmentkit.com/articles/2011/01/a-quick-guide-to-freedom-from-debt/http://www.investmentkit.com/articles/2011/01/a-quick-guide-to-freedom-from-debt/http://www.investmentkit.com/articles/2010/08/when-should-you-exit-your-mutual-fund-investment/http://www.investmentkit.com/articles/2010/08/when-should-you-exit-your-mutual-fund-investment/http://www.investmentkit.com/articles/2010/11/should-couples-keep-their-finances-separate/http://www.investmentkit.com/articles/2011/01/a-quick-guide-to-freedom-from-debt/http://www.investmentkit.com/articles/2010/08/when-should-you-exit-your-mutual-fund-investment/7/29/2019 NPS A NEW LOOK
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His investment decisions are guided more by the ups and downs of the market rather than
by his financial goals. "Discipline should be enforced by the product, which will be in
investors' interest. Pension plans from mutual funds should have at least a 10-year lock-in
period," says Panchmatia.
Also, these funds have a fixed asset allocation for all investors. Whether you are 21 years
old or nearing retirement, your asset allocation will not differ. In the NPS, however, the asset
allocation can be defined by the investor. If he doesn't do so, the defaultoption of the
scheme automatically allocates the money according to age, shifting money out of risky
assets as the person grows older.
"The Templeton India Pension Plan follows a 60:40 allocation to debt and equities. If
allowed, we might consider introducing new options with different asset allocations in the
same fund," says Jaya Prakash K, head of products, Franklin Templeton Investments.
http://www.investmentkit.com/articles/2010/11/govt-probes-defaults-in-national-savings-schemes-nsckvpmis/http://www.investmentkit.com/articles/2011/01/be-aware-of-future-and-options/http://www.investmentkit.com/articles/2011/01/be-aware-of-future-and-options/http://www.investmentkit.com/articles/2010/11/govt-probes-defaults-in-national-savings-schemes-nsckvpmis/http://www.investmentkit.com/articles/2011/01/be-aware-of-future-and-options/7/29/2019 NPS A NEW LOOK
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Another big concern is the higher charges of these funds. In a mutual fund, the distribution
cost is the largest component of the total cost structure. "Pension being a retail product
requires strong distribution support and, thus, a higher expense ratio. Fund houses will find it
difficult to match the cost structure of the NPS," says Shashwat Sharma, partner, KPMG.
The average mutual fund charges roughly 2% per year. Assuming that the NPS charges will
be capped at 0.25%, the difference can add up to a sizeable figure over the long term (see
graph). Clearly, the NPS is the cheapest and best way to plan for retirement.
Source: Economic Times
http://www.investmentkit.com/articles/2011/02/details-of-sbi-15-year-retail-bonds-at-9-95/http://www.investmentkit.com/articles/2010/10/what-is-the-difference-between-ppf-epf/http://www.investmentkit.com/articles/2011/02/details-of-sbi-15-year-retail-bonds-at-9-95/http://www.investmentkit.com/articles/2010/10/what-is-the-difference-between-ppf-epf/