What is National Pension Scheme in India (NPS)

Regardless of how much one earns; all individuals try and create a pool of savings for their retirement. The government tries to promote this by adopting various measures like compulsory deduction of PF and EPF, encouraging savings by allowing tax exemptions or introducing schemes like National Pension Scheme 2012

Not many people in India know what is NPS?

National Pension Scheme in India (NPS Scheme) is amongst many investment options that are promoted (but not so well know so far) by the government of India but there is a major difference between NPS scheme  and other government scheme. National Pension Scheme website details arehttps://www.npscra.nsdl.co.in/

Unlike most government schemes where you get guaranteed returns NPS returns will depend on the efficiency those managing it. So is it a government promoted mutual fund? Read on to understand how the scheme works.

National Pension Scheme 2012 in India

National Pension Scheme details are mentioned below:

• Individuals between the age of 18 and 60 years are eligible to apply for NPS account
• A Tier I account where contributions are made and withdrawals are not permissible
• Later Tier II account can be opened from where withdrawals can be made
• There are 22 registered Points of Presence (PoP) (across the country) which serve as customer service centers.  A few banks and financial institutions have been designated to do so.
• Once you approach the PoP and complete the formalities you will be registered with the CRA (Central Recordkeeping Agency) and will be issued Permanent Retirement Account Number (PRAN).
• NPS form is available from PFRDA website i.e www.pfrda.org.in
• There is no cap on the maximum amount that a person can invest; the minimum investment size is Rs. 500/month or Rs. 6000 annually.
• Fund management charges are almost negligible at 0.0009% and there are some other costs which are quite low as compared to a mutual fund
• Other National Pension Scheme details includes that you could choose from a list of six fund managers which are State Bank of India, UTI, ICICI Prudential, Kotak Mahindra, IDFC and Reliance.
• The investor also has the option to invest in three different investment styles namely i.e high risk, medium risk and low risk. There is no cap on the amount you invest in low risk and medium risk fund styles, but you can invest only 50% of your fund corpus in high risk fund style. Further to your knowledge, the high risk investment option invest upto 50% in equity linked instruments or index funds which replicate Sensex
• There are two options available in NPS account i.e “Auto Choice Option” and “Active Choice Option”. If you are exercising the first option, the money of the investor would be invested in various asset classes as per the investor’s age. If you select the active option, you are required to select one of three investment styles mentioned above

NPS – Swavalamban Scheme

Swavalamban scheme under NPS was launched in September, 2010 under which the Central Government will contribute Rs 1000 per year to each NPS account opened in financial year 2010-11 or in the next three years i.e 2011-12, 2012-13 and financial year 2013-14. Also adding to it, all NPS account opened in 2009-10 will also be eligible under Swavalamban scheme. The eligibility criteria for this scheme is that the investor must contribute a minimum of Rs 1000 and a maximum of Rs 6000 to NPS account per year.

Withdrawals in NPS Account Post and Pre Retirement

If you are aged less than 60 – You are required to invest a minimum of 80% of your pension money accumulated to purchase a life annuity from IRDA. You may withdraw remaining 20% of your amount.

On attaining the age of 60 – You are required to invest a minimum of 40% of your accumulated wealth to purchase a life annuity from IRDA. You may withdraw the remaining amount in a lump sum way or in a phased manner till the age of 70

Death of Investor – In such a case the nominee of the investor can withdraw 100% of the wealth accumulated in the NPS account

Is NPS Scheme a Mutual Fund?

The answer is yes and no? It is like a mutual fund  basic philosophy of investment (where the pooled money is invested in different options) and there are professionals to manage of your money yet the scheme is very different operationally.

First let us understand how is NPS like a mutual fund; first things first the returns are not guaranteed just like in a Mutual Fund.  Mutual fund provide an option where in you could invest in equity or debt instruments and also in different company stocks indirectly; NPS allows you to do the same.

Now for the differences: If you choose an Infrastructure mutual fund then all your money gets invested in stocks of infrastructure companies. If you choose a balanced fund then you get a mix of debt and equity but the proportion is decided by the fund manager which means that you have no say in it. So in case after some years you want to change your mix of investment you cannot do so. Well the NPS scheme gives you a choice to do so; the investor can choose a mix of different type of asset classes and can also change it as time goes by.

You can create your own portfolio by choosing between Equity(E) which is high risk and high return, fixed income instruments( C)  that offer medium returns at medium risk and pure debt instruments (G) with have almost no risk and offer lower returns. Since the idea is to promote stability post retirement the government has decided the equity limit has 50% in any portfolio. This aspect also differentiates it from a mutual fund where if you want all your money can be invested in equity.

Currently the equity part goes to index funds; the fixed income portion constitutes liquid funds, fixed deposits, infrastructure bonds and corporate debt instruments. Pure debt options are central government securities.

Another interesting aspect of the NPS pension fund is that you can change this mix as your age progresses. Just consider this example; Ashish starts the NPS investment at 25 and below is an illustration of how he varies the portfolio mix depending on his age

When Ashish is younger his risk taking capacity is higher and he would like to invest more in Equity and create wealth. As his age progresses he moves away from equity to safer options but does not do away with equity completely. This is just for example sakes many people might want to completely avoid equity by the time they turn 55.

In case the investor does not choose an investment mix himself/herself then the money is invested as per the default option created by the government. This default option has been designed keeping in mind the individual’s risk taking capacity at various stages in life. At the age of 18 the default option will invest 50% of the funds in equity, 30% in fixed income instruments and 20% in pure debt instruments. This remains static till the person turns 36 after which the equity and fixed income contribution decreases and pure debt increases. When the person reaches 55 then  80% will be equity and 10% each for rest of the two.

As stated above there are six fund manager to choose from so if you are not happy with one you could switch to another fund manager unlike a mutual fund where you will have to exit the fund in case you are unhappy which would mean more charges and more formalities

Performance of NPS

Though the scheme is not very old and judging it will be a little premature however certain things can be concluded from its performance in the last few years.

• Due to the low fund management cost banks etc are not pushing it.
• All funds performed much lower as compared to their benchmark in the Equity allocation segment.
• In the C and G options the performance of all funds was way above the benchmark.
• For an aggressive investor the NPS will not be a good option as the low return on equity lowered the overall returns but for a conservative or balanced investment it is a good option.

Though not advertised aggressively the NPS pension fund scheme is gaining momentum albeit a little slowly. The NPS scheme despite its differences is pitched against the mutual funds for comparison. If you are looking at investing in a niche fund like like infrastructure, IT or gold gold ETFs or you are an aggressive investor then this scheme is not for you. But for a safe kind of player National Pension Scheme in India 2012 is an option worth exploring due to its low charges and the government backing