NPS Changes

 





Investors should wait and then figure out whether the proposed changes in the National Pension System benefits them or not.

 

If you are an existing investor in the National Pension Sys tem (NPS) or planning to sub scribe to it, you might want to consider the impact of some proposed changes to the scheme.Among a slew of reforms being considered by the Pension Fund Regulatory and Development Authority (PFRDA), the money of private sector subscribers in the NPS may soon be allowed to be invested in IPOs of Indian companies. Active fund management may be introduced, replacing the current index-only equity investment. Will investors benefit from these changes? To what extent will the NPS investment proposition change?

A radical shift in structure

The NPS is a government promulgated scheme that allows investors to contribute regularly towards their retirement by investing in a mix of government securities, cor porate bonds and index funds. At present, the maximum permissible limit for investment in equities under NPS is 50%. Also, the investments in this category are done passively by mimicking the Nifty index--considered the most stable and strong companies in the equities space. However, if the proposed changes come through, fund managers may be allowed to manage the equity corpus actively instead of merely mimicking the benchmark.

Also, the universe of investible stocks may be expanded to include companies listing on the bourses for the first time. This investment would be subject to the ceiling of 50% that is applicable for equity investment under NPS. This apart, NPS fund managers may be allowed to invest in Real Estate Investment Trusts and Infrastructure Investment Trusts, with a collective cap of 5%, respectively, as well as private equity investments up to 3% of the corpus. These proposed changes are ostensibly to introduce a greater degree of investment flexibility for NPS subscribers. If these are implemented, it would mark a radical shift from the earlier structure of the NPS.

Experts differ over the proposed changes. Some are not convinced with the new structure. This would involve introducing additional risk elements in the form of the fund manager. Many fund managers tend to get carried away in the IPO market. Besides, if active fund management is introduced, the fee structure of NPS is bound to go up. At present, NPS subscribers incur a fee as low as 0.01% of the scheme corpus, apart from transaction charges. Active management would require the fund house to direct more time and resources towards the scheme, necessitating a hike in the fee structure. One cannot have the best of both worlds. Would the NPS ensure the same quality of fund management at prevailing cost? If you want a truly low cost product, then tracking a publicly traded index is the best way.

However, some argue these are steps in the right direction.Pankaaj Maalde, certified financial planner, reckons the shift to active fund management will benefit investors. Index ETF is not the right way to invest in equities in this country. Active funds have a proven ability to beat the index. It would depend on who is managing the fund. one of the current designated NPS fund managers, also supports the moves. Pension is about long-term investments, which require active fund management for generating superior return. He is also comfortable with NPS investing in IPOs and private equity, as the necessary due diligence and risk management will be adhered to.

Raising the investment limit in equity beyond 50%, based on the Bajpai Committee recommendations, has also been discussed.However, it is not expected to be considered right now. The new rules could be announced within a month. Prospective subscribers should wait for the announcement and consider whether the scheme is a worthy proposition suited to their risk profile. Those who have already subscribed have no option but to live with the changes until vesting age as the product permits partial withdrawal only after a minimum 10 years of investment.

 

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