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Anniversaries are usually a time to celebrate and the New Pension Scheme, which completed two years on 1 May, has several reasons to do so. The NPS Lite scheme, which aims to provide pension to the economically weaker sections, has received a thunderous response, with almost 6 lakh accounts opened since its launch.
Many of the funds managed by the six fund managers have outperformed their benchmarks (see table), which means higher returns for investors.
However, the second anniversary of the government-promoted NPS is also a time to introspect and do some course correction. The runaway success of NPS Lite is mainly due to the Swavalamban scheme, under which the government will contribute Rs 1,000 every year in all NPS Lite accounts if certain conditions are met. This subsidy will be doled out for three years, so there's a beeline for opening NPS Lite accounts for availing the Rs 3,000 benefit.
The success of NPS Lite is in stark contrast to the sleepy growth of the Tier I accounts. While the NPS is managing assets worth over Rs 8,000 crore, almost 99% of this is the Central and state government pension accounts. The total assets of the 47,000-odd voluntary investors amount to less than Rs 80 crore. Serious investors are still not interested in the NPS. The scheme has not managed to rope in even 0.1% of the 50 million voluntary investors it was expected to attract.
So, should you invest in the NPS? ET Wealth looks at three factors that make the NPS an attractive option for you and five reasons why we think you should avoid it.
LOW ON COSTS
The NPS is arguably the cheapest investment option in the market. The scheme charges Rs 9 a year for managing a corpus of Rs 1 lakh. Yes, there is also a Rs 350 charged every year for the Permanent Retirement Account Number but the total cost is still lower than the Rs 1,500-2,250 charged by mutual funds and Rs 1,500 charged by Ulips. Over the long term, this difference in the recurring charge can lead to a huge difference in the returns for the investor.
THE ENTRY COSTS OF THE NPS ARE ALSO VERY LOW.
You can open an account by paying a one-time fee of Rs 100-120. In Ulips and pension products from insurance companies, the charges in the initial years are very high. There are also other administrative charges that one doesn't pay in case of NPS. "The low cost determines the uniqueness of NPS," says Amar Ranu, senior manager, Wealth Management, Motilal Oswal Securities.
CHOICE OF FUNDS
There are six fund managers handling the investments in NPS. Unlike a mutual fund or a Ulip, the NPS offers the investor to switch from one fund manager to another if he is not satisfied with the performance of a certain fund. Withdrawing from one fund and investing in another will not have any tax implication because the money remains invested.
MORE TAX BENEFITS
This year's Budget has made the NPS more beneficial from the tax angle. From the next financial year, contributions by employers to the NPS accounts of their employees can be deducted as a business expense. Currently, the contribution made by an employer to the NPS is not allowed as a deduction.
Also, such contributions will not be part of the Rs 1 lakh tax deduction limit under Section 80C. Since contributions to NPS are not taxable, your employer's contribution on your behalf will be a tax free benefit for you. Experts advise that one should request one's employer to rejig the compensation structure by replacing taxable components like special allowance with the tax-friendly NPS.
NO ONE'S SELLING
Opening an NPS account is like a cross country hurdle race. The low distribution and expense structure means nobody is interested in selling the scheme to the investor. In an earlier interview, PFRDA Chairman Yogesh Agarwal told us that the 0.0009% annual fund management charge is very low and hardly gives the fund manager any incentive to sell. It's ironical that the most attractive aspect of the scheme has become its worst disadvantage.
One way out is to raise the fund management charge, but NPS officials say that is not possible because charging a higher fee out of the AUM now would be unfair to investors who are already in. The G.N. Bajpai committee is looking into the reasons that are stifling growth for the NPS. "The committee must address the cost incentive issue," says Gautam Bhardwaj, director of the Invest India Economic Foundation, a Noida-based think tank working in the areas of financial policy and public awareness.
YOU CAN'T CHERRY PICK
The six fund houses handling the NPS investments and their fund managers have expertise in different areas. Some fund manager may be adept at stock picking while another may be good at spotting opportunities in the debt market. That is why the returns of the funds also differ. Unfortunately, though the NPS architecture had originally proposed that NPS investors can spread their investments across several funds, back office bottlenecks have restricted the choice to only one fund house. So, you can't choose SBI Fund to manage your debt portion and IDFC Fund to dabble with the equity part. The entire corpus must be handled by the same fund. "The original PFRDA architecture had allowed investors to cherry pick according to the performance but this is yet to be implemented. The Central Recordkeeping Agency has to make the necessary back-office changes to allow this facility," says N.R. Rayalu, CEO of the NPS Trust.
VIOLATION OF MANDATE
Pension funds are known to be very conservative and steer clear of risky investments. That's why, the maximum exposure to equities is limited to 50% and that too in Nifty-based stocks in the same proportion. The funds are also supposed not to invest in bonds below the AA rating. But some funds are apparently breaking the rules and investing in riskier BBB-rated paper to boost returns. Earlier this year, the PFRDA pulled up SBI Fund for investing nearly 50% in low-rated bonds that offered higher interest.
The C class fund of SBI has been the top performer with 12.2% annualised returns since launch but this spectacular growth has come by taking more risk than they are supposed to. Kotak Mahindra Pension Fund, UTI Retirement Solutions and the LIC Retirement Solutions (which manages only the government pension funds) were also found to have a significantly high exposure to risky assets.
Another problem is that some funds keep a large portion in cash, which pares the returns. Since all of them invest in the same stocks and in the same ratio, there should not be too much of a difference in the returns. Yet, the E class fund of SBI has managed an annualised return of 8.68% compared to the 13.69% growth clocked by the Nifty during the same period. "We have asked all funds not to sit on cash," Rayalu told ET Wealth.
Which NPS fund should you invest in? Nobody can tell you because there is just no way to assess the performance. The CRA gives out only the previous day's NAV but the historical data is not there. We have analysed the performance of the Tier I funds since launch in May 2009 because that's when the NAV was Rs 10. Some funds have separately provided the information of the funds they manage on their website but there is no way to get a comparative view of all the funds. "Tracking the performance of NPS funds is not easy," says Lovaii Navlakhi, Managing Director and Chief Financial Planner of the Bangalore-based International Money Matters. A few clicks of the mouse can give you the returns of any mutual fund scheme between any two days. Why the CRA cannot provide such a facility to check the historical performance of the funds is inexplicable.
Indians are living longer than before. From about 55 years in 1980, the life expectancy has gone up to 67 years now. By 2020, it is expected to go up further to 72 years. In urban areas, where the access to health care is better, people will live even longer. Also, many will be working even after they turn 60.
But the NPS has closed its eyes to these realities. Contributions stop and withdrawals begin at 60 and you have to compulsorily withdraw the entire amount by the time you are 70. Such a straitjacket can pose a problem to a person who plans to stop working at age 65 and expects to live till 75-80 years. What will he do with the money if he is forced to withdraw his entire corpus at the age of 70?
No.E(P&A)ll-2008/HRA.10 New Delhi, dated 16-5-2011.
The General Managers/CAOs,
All Indian Railways & Prod.Units etc.
(as per mailing lists No.1 & II).
Subject: Decision of the Government on the recommendations of the Sixth Central Pay Commission relating to re-classification of cities/towns for grant of House Rent Allowance (HRA) to Railway employees.
Attention is invited to para 6 of Board's letter of even number dated 12.9.2008 on the above mentioned subject, vide which the special dispensation for grant of HRA has been allowed to continue to (i) Faridabad, Ghaziabad, Noida & Gurgaon at "X” class city rates and (ii) Jalandhar Cantt. Shillong, Goa & Port Blair at "Y" class city rates and to state that the special dispensation allowed to Panchkula for grant of HRA at par with Chandigarh vide Board's letter No. E(P&A)ll-2003/HRA-6 dated 19.8.2003, shall also continue.
2. In this context, it is also clarified that any other similar special dispensation allowed by the Railway Board in the past in respect of other cities or grant of HRA at higher rates and not specifically mentioned in Board's letter of even no. dated 12.9.2008. shall continue to apply, if the same has not been superceded/dispensed with or the existing classification of such city has not been revised to higher classification on account of the population criteria, vide Board’s letter of even no.dated 12.9.2008.
3. These orders shall be effective from lst.September, 2008.
4. All other conditions governing grant of HRA under existing orders shall continue to apply.
5. This issues with the concurrence of the Finance Directorate of the Ministry of Raiways