NPS in direct stocks: Good for investors

No immediate benefits for fund managers

Reports suggesting that the Pension Fund Regulatory and Development Authority (PFRDA) has allowed fund managers of New Pension Scheme (NPS) to invest in direct stocks is a good step for investors in equities.

For one, the money will be available to fund managers for longer periods as investors won't be able to withdraw the money. So long-term investment calls, which are most important for equity investments, can be taken. And even if the equity market is going through a downturn and the returns are negative or a year or two, they will be unable to withdraw the money. For instance, Franklin India Bluechip has returned 8.52 per cent annually in the last five years - just about beating the inflation rate. But since its launch in 1993, it has returned 23 per cent annually. In other words, if investors have stayed invested in the scheme, they would be sitting on a pile of cash. The PFRDA has also allowed investment only in Sensex and Nifty stocks in which derivates are available.

More importantly, even the most aggressive investors under NPS can invest only 50 per cent in equities, there would be a hedge again prolonged fall in the stock markets.

However, for fund houses, active fund management may not be too lucrative, as the fees being paid aren’t great. It would be interesting to see if there is a change in the fee structure in the future to accommodate active fund management. At present, neither the corpus not the expense will be an incentive.