The investment horizon of NPS is significantly longer than that of mutual fund investments and the applicable regulatory guidelines are also different says Meghana Baji, CEO and CIO of ICICI Prudential Pension Funds Management Company. In an interview with FundsIndia, Baji highlights the edge that NPS has over other pension products.
Excerpts:
What edge does NPS have over other pension products?
The key features which differentiate NPS from other pension products are: Portability, Simplicity, Flexibility, Low cost and Tax efficiency
• Portability: Retirement account (PRAN) can be retained across employers and locations
• Simplicity: Simple, standardised product designed by PFRDA
• Flexibility: Choice of funds (Equity, Corporate Bonds and G-Secs), PFMs and Points of Presence (including banks and other distributors)
• Low cost: Lowest cost investment product currently available in the market
• Tax efficiency: Employers contribution to NPS up to 10% of salary (basic +DA) is exempt from tax under 80CCD
The tax efficiency of NPS combined with simplicity and portability give NPS an edge over competing products.
Will the revised guidelines for NPS have an impact on portfolio performance going forward?
The revised guidelines recommended by PFRDA would help in further controlling the risks associated with the portfolio. Additionally it would help to further diversify the portfolio and ensure stable returns over a long term.
Did you change your equity portfolio after the revised guidelines?
Investments made after the revised PFRDA guidelines came into effect comply with the new norms.
What is the portfolio turnover of your equity fund?
Historically, the equity portfolio was managed as an index fund replicating the Nifty 50 index, hence the turnover was low at 0.03% during FY2013. However post the revised PFRDA guidelines which require active management of the equity portfolio, we expect the turnover to increase in the future.
Do you intend to take exposure to mid-cap stocks (which are in the derivative segment) or stick to large-caps? What proportion of portfolio would have midcaps at present?
Since our equity fund was managed as an index fund till recently, the current equity portfolio has no exposure to mid-cap stocks. However, going forward, we may review the portfolio to include a few investments in fundamentally strong mid-cap companies. However, considering that the portfolio belongs to a long-term pension product, the intent is to carry higher exposure to large-caps.
Your gilt fund has a 17-year average maturity. Is this not high risk? Would this number drastically change in 6 months to a year when rates fall?
Considering the design of the NPS product, most of the subscribers are expected to stay invested in till their retirement age of 60 years, resulting in an average investment horizon of 20 – 30 years for the subscribers. The high average maturity of our gilt fund is in line with the nature of the product and its long-term investment horizon.
However, we would review the portfolio regularly depending on market conditions and our internal research findings.
How differentiated would your NPS strategy be (within the regulatory ambit) when compared with ICICI Pru mutual funds?
Considering that NPS is a long term pension product, the investment horizon of NPS is significantly longer than that of mutual fund investments. The applicable regulatory guidelines are also different.
The new PFRDA guidelines set limitations on exposure to a company, industrial sector and group. Accordingly, our investment strategy would be considerably different as compared to mutual funds.
As a pension fund, our equity fund would make long-term investments in fundamentally strong companies and therefore is expected to have a lower churn. Our debt fund would focus on investing in companies with high credit quality and would have longer maturity in line with the nature of the product.
What according to you would be an ideal asset allocation (between Schemes E, C G) for somebody who has 15-20 years to go for retirement?
The NPS product provides for auto choice for life cycle based asset allocation. Under this option, the asset allocation suggested by PFRDA for subscribers aged 40-45 years is as follows:
Equity (E Scheme) – 30% to 40% ; Credit risk bearing (C Scheme) – 20% to 25%; Government securities (G Scheme): 35% to 50 %
While the above asset allocation may be treated as a generalised guidance, it is recommended that each NPS subscriber assess their own risk appetite and decide the long-term asset allocation accordingly.
How would you differentiate ICICI Pru’s pension fund when compared with other PFMs?
ICICI Prudential Pension Funds Management offers an integrated one-stop-solution to NPS subscribers. Customers can select ICICI Prudential Life Insurance as the annuity service provider. Moreover, our regular engagement with corporates whose employees are registered with us for NPS can leverage this integrated set-up.
This makes our NPS offering a more compelling proposition for subscribers. Additionally, an e-module and an online registration process for subscribers are added benefits.
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UTI RETIREMENT BENEFIT PLAN HAS DELIVERED MORE THAN 9% SINCE ITS LAUNCH AND ONE CAN EXIT AFTER 5 YEARS WITHOUT EXIT LOAD. HOW NPS IS BETTER THAN UTI RBP. WHICH ONE CAN I CHOOSE?
Hello Prema, UTI Retirement Benefit plan is not similar to NPS as the latter is truly built as a pension product where you need to save till retirement and you are required to annutise a part of your money. Hence, they are not comparable. In terms of performance, it may be early to judge NPS (although it has done well recently) but UTI Retirement Benefit is a mediocre performer. For a fund which takes about a third of exposure to equities, we feel peers (with similar proportion in equities) such as FT Life Stage FoF 40s Plan may be better saving vehicles with the MF universe. Thanks, Vidya
Hallo vidya
Nice reply. But there is no sec 80 c benefit for FT Life stage FOF plan.
Hello Prema, Yes, you are right. But should all savings be directed only with tax in mind? What if an investment vehicle delivers superior returns overall? There are after all, enough ways to get 80C benefits! Conversely, look at it this way: should you settle for a sub-optimal product simply because they give tax benefit? (which is why ppl tend to buy complicated insurance products). Points to ponder 🙂 Tks, vidya
UTI RETIREMENT BENEFIT PLAN HAS DELIVERED MORE THAN 9% SINCE ITS LAUNCH AND ONE CAN EXIT AFTER 5 YEARS WITHOUT EXIT LOAD. HOW NPS IS BETTER THAN UTI RBP. WHICH ONE CAN I CHOOSE?
Hello Prema, UTI Retirement Benefit plan is not similar to NPS as the latter is truly built as a pension product where you need to save till retirement and you are required to annutise a part of your money. Hence, they are not comparable. In terms of performance, it may be early to judge NPS (although it has done well recently) but UTI Retirement Benefit is a mediocre performer. For a fund which takes about a third of exposure to equities, we feel peers (with similar proportion in equities) such as FT Life Stage FoF 40s Plan may be better saving vehicles with the MF universe. Thanks, Vidya
Hallo vidya
Nice reply. But there is no sec 80 c benefit for FT Life stage FOF plan.
Hello Prema, Yes, you are right. But should all savings be directed only with tax in mind? What if an investment vehicle delivers superior returns overall? There are after all, enough ways to get 80C benefits! Conversely, look at it this way: should you settle for a sub-optimal product simply because they give tax benefit? (which is why ppl tend to buy complicated insurance products). Points to ponder 🙂 Tks, vidya
Please see the various concerns that are raised in the following link by a financial planner / expert. Most of which looks very valid. Your Thoughts ?
http://www.subramoney.com/2010/04/national-pension-scheme-what-is-missing/
Hello Ramakrishnan, as the author himself pointed out, it is a feature of any pension plan. Through a recent change, NPS will now allow you to withdraw the 60% corpus (40% to be annuitized) as a lump sum anytime between your age of 60 and 70. Earlier, you had to do only a phased withdrawal every year. I think that 60% is a good enough amount for you to move a bulk of your corpus to avenues such as post office seniot citizen. The rest, as the very idea behind the product is, is meant to be a pension and hence the annuitization. NPS works out as a super low ocst model hen you compare it with any other saving cum pension plan in the insurance market today. It is sadly not marketed well simply because there is no big commission invovled for your next door neighbour-agent 🙂 Thanks.
Please see the various concerns that are raised in the following link by a financial planner / expert. Most of which looks very valid. Your Thoughts ?
http://www.subramoney.com/2010/04/national-pension-scheme-what-is-missing/
Hello Ramakrishnan, as the author himself pointed out, it is a feature of any pension plan. Through a recent change, NPS will now allow you to withdraw the 60% corpus (40% to be annuitized) as a lump sum anytime between your age of 60 and 70. Earlier, you had to do only a phased withdrawal every year. I think that 60% is a good enough amount for you to move a bulk of your corpus to avenues such as post office seniot citizen. The rest, as the very idea behind the product is, is meant to be a pension and hence the annuitization. NPS works out as a super low ocst model hen you compare it with any other saving cum pension plan in the insurance market today. It is sadly not marketed well simply because there is no big commission invovled for your next door neighbour-agent 🙂 Thanks.
Thanks a lot for your response. I am already a subscriber of NPS. But I am not happy with the flexibility particularly in terms of making transactions. If they are really low cost, why are they not allowing subscribers to make additional investment online through netbanking ? Contributions through Cheque is cumbersome as it has to go through POP… ECS entails Rs.5/= for every transaction which means If I do SIP, I will have to shell out more for ECS. Atleast they should provide a facility to subscribe online which will enable subscribers to make additional contributions as and when they see markets going down. For instance, markets are hitting fresh lows almost every week and it would make sense for me to contribute incrementally once in a week or once in a fort-night. Why no one is taking any steps towards recommending online contributions. Your Thoughts!
Hi Ramakrishnan, Yes, true that what you ask for is not available with NPS today. But it has never been available with provident funds too isn;t it?
Also, I am not sure it is a good idea for NPS to manage uncertain fund flow (if they allow you to invest any time etc.). Remember these funds have much lower fund management fee than regular funds and you cannot therefore expect them to behave like regular funds. Also, only 50% of your money would go to equities, even if you try to average. The averaging that you are talking about are best done in regular equity funds.Thanks.
Thanks a lot for your response. I am already a subscriber of NPS. But I am not happy with the flexibility particularly in terms of making transactions. If they are really low cost, why are they not allowing subscribers to make additional investment online through netbanking ? Contributions through Cheque is cumbersome as it has to go through POP… ECS entails Rs.5/= for every transaction which means If I do SIP, I will have to shell out more for ECS. Atleast they should provide a facility to subscribe online which will enable subscribers to make additional contributions as and when they see markets going down. For instance, markets are hitting fresh lows almost every week and it would make sense for me to contribute incrementally once in a week or once in a fort-night. Why no one is taking any steps towards recommending online contributions. Your Thoughts!
Hi Ramakrishnan, Yes, true that what you ask for is not available with NPS today. But it has never been available with provident funds too isn;t it?
Also, I am not sure it is a good idea for NPS to manage uncertain fund flow (if they allow you to invest any time etc.). Remember these funds have much lower fund management fee than regular funds and you cannot therefore expect them to behave like regular funds. Also, only 50% of your money would go to equities, even if you try to average. The averaging that you are talking about are best done in regular equity funds.Thanks.
Hi Vidya:
I’ve been a regular reader of your periodic reviews of investment products. Your analysis and insights do help.
As regards the popularity of NPS, I agree with you that it less known to people because of lesser efforts by PFRDA on increasing investor awareness. Further more, the private employers are not much enthusiastic in incorporating NPS in payroll due to which the employees only have the option of EPF.
I wish the PFRDA takes proper steps to simplify/improve and popularize NPS. I was looking at my NPS account details on NPS website (cra-nsdl.com), and it was bit difficult to figure out the performance of my investments in NPS so far ! Even the PFMs are not motivated to send the performance reports to the NPS investors (like they are in case of mutual funds 😉 )
Thanks.
Hi Mukesh,
Thanks for sharing your views. it is indeed sad to note that a good product like NPS should suffer for want of procedural simplicity and good disclosure. Only hoping these issues will be resolved soon. thanks.
Hi Vidya:
I’ve been a regular reader of your periodic reviews of investment products. Your analysis and insights do help.
As regards the popularity of NPS, I agree with you that it less known to people because of lesser efforts by PFRDA on increasing investor awareness. Further more, the private employers are not much enthusiastic in incorporating NPS in payroll due to which the employees only have the option of EPF.
I wish the PFRDA takes proper steps to simplify/improve and popularize NPS. I was looking at my NPS account details on NPS website (cra-nsdl.com), and it was bit difficult to figure out the performance of my investments in NPS so far ! Even the PFMs are not motivated to send the performance reports to the NPS investors (like they are in case of mutual funds 😉 )
Thanks.
Hi Mukesh,
Thanks for sharing your views. it is indeed sad to note that a good product like NPS should suffer for want of procedural simplicity and good disclosure. Only hoping these issues will be resolved soon. thanks.
Pls. see response from PFRDA on online payment option through net banking. Can you please find if IL&FS, the POP through which Funds India offers NPS to customers provide this facility? If not, Can you move to a POP that offers this facility?
Subject: Fwd: Enquiry / Request – Reg.
To: kalanchery@yahoo.com
Date: Friday, November 8, 2013, 5:24 PM
Dear Subscriber,
PFRDA has been advising POPs to extend online facility to the subscribers
for deposit of contribution. Some of the POPs are already extending this facility to their customers. Please contact your POP to check whether this facility is available with them or not.
With Warm Regards,
Grievance Redressal Cell
Pension Fund Regulatory
& Development Authority PFRDA
Plot No. 6, ICADR
Building,
Institutional Area Phase II, Vasant Kunj, New
Delhi
PIN-110070
Hello Sir,
Our associate shall get back to you, through mail with regard to your query. thanks, Vidya
Pls. see response from PFRDA on online payment option through net banking. Can you please find if IL&FS, the POP through which Funds India offers NPS to customers provide this facility? If not, Can you move to a POP that offers this facility?
Subject: Fwd: Enquiry / Request – Reg.
To: kalanchery@yahoo.com
Date: Friday, November 8, 2013, 5:24 PM
Dear Subscriber,
PFRDA has been advising POPs to extend online facility to the subscribers
for deposit of contribution. Some of the POPs are already extending this facility to their customers. Please contact your POP to check whether this facility is available with them or not.
With Warm Regards,
Grievance Redressal Cell
Pension Fund Regulatory
& Development Authority PFRDA
Plot No. 6, ICADR
Building,
Institutional Area Phase II, Vasant Kunj, New
Delhi
PIN-110070
Hello Sir,
Our associate shall get back to you, through mail with regard to your query. thanks, Vidya
No one from your office reached out to me. Even today, I don’t see an option to make NPS contributions online through funds India.
Dear vidhya ji
I want to change my NPS account from cananra bank to other which institution is good for me.I want to deposit 1000/- P.M in NPS
You can go with any public banks which offer NPS.
Initially I want to invest 1000 every month in SIP in NPS but in the subsequent years I want to increase my SIP amount as my salary is increased.Is it is possible to increase the SIP amount at the start of a financial year or we have to stick with the amount that we have started with?
Initially I want to invest 1000 every month in SIP in NPS but in the subsequent years I want to increase my SIP amount as my salary is increased.Is it is possible to increase the SIP amount at the start of a financial year or we have to stick with the amount that we have started with?
Dear vidhya ji
I want to change my NPS account from cananra bank to other which institution is good for me.I want to deposit 1000/- P.M in NPS
You can go with any public banks which offer NPS.
No one from your office reached out to me. Even today, I don’t see an option to make NPS contributions online through funds India.