But one can create a portfolio with different instruments as well.
Mayank wants to subscribe to the New Pension Scheme (NPS), as he has seen a lot of favourable coverage about it. He knew about the reforms proposed by the Committee to REview Implementation of Informal Sector Pension (CRIISP).
The report was proposing to incentivise both points of presence (POP) as well as allow fund managers to earn a remunerative fee. Mayank was wondering why NPS did not appeal to people.
There are three funds to choose from. A person can choose to invest in an equity fund (E ), a fixed Income fund other than government securities (C) and a government securities fund (G), according to the risk preference. The first one is an index fund that tracks the NSE Nifty 50 or BSE Sensex. You can actively allocate the proceeds to the different funds, if you choose to. In the equity fund, the allocation cap is 50 per cent. However, you are at liberty to allocate up to 100 per cent in any of the other two funds.
Or you could opt for ‘Auto choice’ allocation of your investments. The allocations, will then be made in line with the age in the three different funds and they are rebalanced every year, automatically, in a predetermined way. Up to 35 years, there will be 50 per cent in equity and the balance will be in C & G. From the 36th year on, equity allocation keeps coming down and more money gets allocated to the other two funds. This is useful for those who don’t want to manage their funds themselves.
There are currently six fund managers to choose from. The returns generated by the fund managers (for the year ended March 31, 2011) are widely different in all the three funds. In the equity fund, the returns varied between 8.05 and 11.89 per cent, compared to the Sensex and Nifty returns of 10.94 per cent & 11.14 per cent, respectively. In the C fund, the returns varied between 6.26 and 12.66 per cent; in the G Fund, it was between 6.97 and 12.52 per cent. It was found the best-performing fund in one category was not so in the other categories. One can invest in all three funds, but with a single fund manager only. This means if you invest with one fund manager and across funds, there will invariably be one or more funds not performing to potential.
There is a one-time account opening charge of Rs 50 and the annual maintenance charges are Rs 280. There are charges per transaction of Rs 20 at the POP and another of Rs 6 by the Central Record keeping Agency (CRA). The POP also charges Rs 40 for initial subscriber registration and contribution upload. There are custodian charges of 0.0075 per cent yearly for the electronic segment and 0.05 per cent yearly for the physical segment. And, the unbelievably low fund management charge (FMC) of 0.0009 per cent a year.
Types of accounts
The tier-1 account, a non-withdrawable account, can be invested into till retirement. At 60, you would have to annuitise at least 40 per cent of the amount and the remaining amount can be withdrawn at one stroke or in a phased manner. If you withdraw before age 60, you will have to compulsorily buy an annuity for 80 per cent of the accumulated amount and could withdraw only 20 per cent.One could also open a tier-2 account, akin to a savings account. One can put in and withdraw money anytime here. A person having a tier-1 account may open a tier-2 account without any further charges.
However, investors like Mayank need to know both the positives and negatives of the scheme before subscribing. The positives: A comprehensive, low-cost way of building one's retirement corpus. Since it has a tier-1 and tier-2 account, it neatly addresses the long-term and short-term needs of an individual. In the tier-2 account, since there are no exit loads on withdrawal anytime, it is like a savings account with potentially better returns. The charge being low is a positive. Portability of the account across the country is a big positive.
The negatives: Since there is little incentive for the POP to sell the product, banks and other entities are not interested in promoting it. The awareness is low leading to very poor penetration of NPS among the public. The fund managers have little incentive with the management charge being 0.0009 per cent yearly! Anything that is a win-lose proposition won't work.
For all the three funds, there is one fund manager. This restricts choice for investors, as they may want to keep the money in an equity fund with one and the debt fund with another, much as in mutual funds. And, taxation as it stands today is against pension products. All annuities are currently taxable as income.
So, while it is certainly not a bad product, it does have limitations. If you are interested in building a retirement corpus, one could consider investing in a basket of securities — public provident fund (PPF), fixed deposits (FDs), bonds, debentures, debt funds, equity oriented products and so on. At retirement, an immediate annuity can be taken, if required. This offers flexibility during the investment phase and a choice of the annuity provider at retirement.
The author is a certified financial planner