Thursday, August 16, 2012

Is National Pension Scheme (NPS) A Worthwhile Investment Option?

Around a year and a half ago, I wrote an article titled The National Pension System – De-Mystified in which we had taken a detailed look at this National Pension Scheme (We will refer to this as NPS throughout this article) that the Government of India started in 2009. A few days later there was a subsequent article titled National Pension Scheme - All your Questions Answered!!! in which I had tried to answer our blog readers questions on the NPS. It has been over 3 years now since the Government of India started the NPS. The purpose of this article is to analyze if the NPS Schemes have lived up to their expectations and the future course of action for the Indian Investor

How the Different NPS Fund Houses have performed over the Past 3 years

As outlined in the article introducing the NPS, there are several Fund Managers that an investor can choose from when he/she opens the NPS Account. Each of these fund managers may choose to invest in a different set of instruments and hence the returns will not be uniform. As a general categorization, the NPS Fund Managers manage 3 categories of funds in Tier 1:
a. Category E – Equities
b. Category C – Corporate Bonds
c. Category G – Government Securities

Different Fund Managers have performed differently in each of the above categories. After gathering details about the performance of each of the different fund managers, I have shortlisted the best or rather top 3 performers in each category over a 3 year time period. They are:

Equities – Category E Funds:
1. Kotak – 6.82%
2. ICICI Prudential – 6.43%
3. IDFC – 4.98%

Category Average Returns = 5.58%

Corporate Bonds – Category C Funds:
1. Kotak – 12.05%
2. ICICI Prudential – 11.59%
3. IDFC – 9.24%

Category Average Returns = 9.97%

Government Securities – Category G Funds:

1. Kotak – 7.95%
2. ICICI Prudential – 7.7%
3. UTI – 7.5%

Category Average Returns = 7.32%

Note:

All returns above are over a 3 year period. Don’t be amazed by the dismal returns generated by the Equity funds. The Indian stock market has been extremely volatile over the past few years and a positive returns % indicates the fact that the fund managers have done a great job.

As you can see, the funds managed by Kotak and ICICI Prudential have been the top 2 in all of the categories.

Is the NPS Scheme Popular?

The simple answer would be – NO

If you wish to dispute this claim and say that NPS is popular, stop for a moment and give me an answer to this question – “Do you have an NPS Account?” The answer you will give in response to this question is the answer to the question above as well…

Problem No. 1: Have you seen any advertisement by any fund house about the performance of their funds in NPS? For ex: the schemes managed by Kotak Pension Fund have churned out the best possible returns in all the 3 categories. ICICI Pru has been the 2nd best performer. So, given this fact, have either of these two fund houses advertised their success? This whole phenomenal success has gone almost unnoticed. Nobody publicized the fact that their schemes in NPS were successful. Whereas, the same Kotak and ICICI Pru fund houses always advertise their best performing Mutual Fund Schemes. Why this disparity???

Problem No. 2: Have you seen anybody trying to sell NPS Schemes to investors? The NPS has approx. 25 lakh investors out of which almost everyone is from State & Central Government for whom NPS is compulsory. The distributors are not selling NPS at all. In fact, less than 50,000 people have voluntarily invested in NPS in the past 3 years. Why do you think this is happening?

Why Fund Managers are not advertising their Schemes in NPS?

The simple answer is – MONEY!!!

The fees that fund managers receive for managing the NPS schemes is nothing short of dismal. The fund management charge is 0.0009% which means, a fund manager get Rs. 9/- for managing Rs.10,00,000/- for one year. The average fee for managing a similar number in Mutual funds works out to a 4 digit number and the same for ULIPs is a 5 digit number.

Why Distributors are not selling NPS Schemes?

The simple answer to this question too is – MONEY!!!

I could not find the actual commission/fee that Distributors get for selling NPS but I would assume it will be around the same range as what the fund managers get. If the fee the person who manages the money (Fund Manager) is only Rs. 9/- for a 10 lakh investment, what do you think the distributor will get for selling NPS Schemes? Distributors feel that the profits they earn out of selling this low-cost scheme does not justify the amount of money or resources that go into selling it.

What is being done to fix this?

The PFRDA has been contemplating increasing these fee & commission charges that the distributors and fund managers receive for dealing with NPS. Hopefully this upward revision of fee will be the much needed boost to both the fund managers as well as distributors to take NPS Seriously.

However, a point to note here is that, no concrete numbers have been released by the PFRDA yet. However, it is expected to come out very soon. But, experts from the industry feel that the number would be around 0.25% (Rs. 2,500/- per Rs. 10 lakhs) which is a sizeable increase when compared to the current dismal figures.

Will this affect the Investor?

Of Course, it will. However, the impact will be almost negligible. Mutual Funds charge around 1-2% per year and ULIP’s charge even more. If we consider a 0.25% fee for the fund manager and the same for the distributor, for every 10 lakhs you invest, 9.95 lakhs is going to be effectively invested which is much higher than what happens in the case of Mutual Funds or ULIPs. So, it is safe to say that the impact will be very minimal.

How Increasing the Fee’s will help?

First of all, if the fee fund managers get is reasonable for the effort they spend managing the money, they will start advertising the fact that they are managing X Crores of money for NPS. Second of all, if distributors can make a reasonable income by selling NPS products, they will start advertising as well as selling NPS Schemes to investors. So, it will be a WIN-WIN Scenario.


Is National Pension Scheme (NPS) A Worthwhile Investment Option?

Of Course – YES.

Frankly speaking, the NPS Schemes are managed by the same expert fund managers who manage the top mutual fund schemes of India. So performance wise it would be safe to say that NPS schemes will fare at around the same level as regular mutual funds.

More importantly, the fee’s charged by NPS is the least in the industry. Even if we assume a 0.25% fund management fee and a 0.25% distributor fee, the overall fee’s paid works out to less than 1%. The fees and charges for Mutual Funds and ULIP’s or other Pension Plans is much higher. So, effectively more of our money will get invested and in turn, we will get better returns.

To further substantiate my claim that NPS is a better investment option than a ULIP Pension Plan – due to the lower fee structure, the next article is going to be a comparison in terms of overall returns between the NPS and ULIP Pension Plans.

If you are still not too sure if the NPS is a good investment option in comparison to the regular ULIP Pension Plans that are being sold aggressively, just relax, the feeling is very common. The next article will be a simple returns comparison between the two products to help you decide...

Happy Investing!!!

24 comments:

  1. good post Atnand, for me the main deterrent is that the NPS lumpsum money is taxed.

    ReplyDelete
    Replies
    1. Hi Ram,
      You cant actually withdraw the whole amount. At least 40% of the maturity proceeds must be used to purchase an annuity product. The higher the better. And, upto 40% of the maturity proceeds can be withdrawn without any tax implications.

      So, effectively only 20% of the maturity proceeds is taxable and if you buy an Annuity product worth 60% of your maturity value, you pay no tax.

      So, I dont think this should be a deterrent for investing in NPS. NPS is a pension scheme and the annuity product is going to give you just that.

      Anand

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    2. Ram - To explain further on the taxation aspects of NPS I have posted an article for the same. Hope you find it useful.

      http://anandvijayakumar.blogspot.sg/2012/08/national-pension-scheme-and-taxation-at.html

      To read it Click Here

      Anand

      Delete
  2. Anand: 40% with Anuity in insurance companies is a clause I am worried with as we dont know how the products will be. Also, I would like to get a lumpsum on retirement, so assuming I use 40% for annuity and rest 60% I withdraw at 60, the 60% is taxed right?

    ReplyDelete
    Replies
    1. Ram,
      Did you read the new article? http://anandvijayakumar.blogspot.sg/2012/08/national-pension-scheme-and-taxation-at.html

      No. The 60% is not taxed. 40% is non taxable. So, let us say you had 10 lakhs at maturity out of which you purchased annuity for 4 lakhs and take out the rest - 6 lakhs, 4 lakhs out of it is not taxable. So, you will be taxed only for 2 lakhs which is 20% of the maturity amount.

      And - as you fear - we cant guarantee that the annuity products 20 or 30 years down the line will be good. But, that is a risk we have to take. I believe IRDA will only select those insurance providers who give good products to the common man.

      Only time will tell :)

      Anand

      Delete
  3. Hi Anand: Sorry for still not getting clarity. Let me understand this. if I have 10 lakhs, 4 lakhs I buy annuity (so no tax), of the 6 lakhs left, you are saying I dont have to pay tax for 3.6 lakhs (60% tax exempted?) and remaining 2.4 is taxed (40%)?

    2. the link you gave states only 40% is exempted and not 60% as you have quoted above "The money which is left after purchase of mandatory annuity, up to the extent of 40% of the accumulated wealth, is exempt from tax and you are free to use it the way you want. "

    3. given that the lumpsun amount is taxed, annuity returns are taxed, and also uncertanity with annuity products, would it not be good to invest in MF with balancing btw equity and debt with progression, as they are tax free and we can evaluate the scenario and invest in a product thats good?

    Sorry if the questions are silly.

    ReplyDelete
    Replies
    1. Ram - It is ok. It is better to ask silly questions than making silly decisions when it comes to finance. So, here goes...

      1. The % is all calculated at the maturity value. So, 60% of 10 lakhs = 6 lakhs remains after taking the annuity. 40% of 10 lakhs can be withdrawn without taxes, so effectively you will pay taxes only for 2 lakhs if your maturity value is 10 lakhs (20%). If you include this 20% in the annuity you effectively pay no tax on withdrawals.

      2. Again - you got confused with the %s. 40% of the maturity amount can be withdrawn and used as per your wish. no questions asked. 4 lakhs per our example calculations

      3. No. the lumpsum is not taxed. only 20% of the lumpsum and that too, only if you opt to withdraw it is taxed. The current annuity products are good and given the fact that things improve over time, we can be 99% sure that the annuity products 20 or 30 years down the line will be at least as good as they are now or even better. So, dont worry about it.

      If you invest in MF's you dont get the tax benefits as you do for investing in NPS. I am not saying that MF is not a good investment option but NPS is a pension scheme where the purpose is to generate a sustained income for the individual after retirement. So, MFs cannot do that...

      Hope the questions got answered :)

      Anand

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    2. And - dont forget to like the blogs facebook page. You can also leave your comments there :)

      Delete
    3. Hi Anand

      I recently opened a NPS account and started with Tier-1 and recently opened Tier-2. Can you explain me how should one go about investing between Tier-1 and Tier-2?

      Thanks
      Anand M

      Delete
    4. Hi - The choice of how much you want to invest in each category is entirely yours. In the Tier 1 Acc is blocked until you reach 60 while you can withdraw from Tier 2 whenever you want.

      So, invest what you want for retirement in Tier 1 and then put in the surplus that you may utilize for emergencies in Tier 2...

      Anand

      Delete
  4. Thanks Anand. I understood it. I understand MF will not give it, but my thought is to do a systamatic invesment in MF with balanced portfolio tuned to age and then close them on retirement (100% tax exempted if 1 yr more) and then invest in a good product which will give sustained monthly income. Also, in this case, during emergency situation it gives us a way to withdraw which is not there in NPS.

    Thats my only concern with NPS vs MF

    ReplyDelete
    Replies
    1. Ram - This is one of the problems we Indians have. Worrying about liquidity in a retirement scheme. You are saving money for your retirement - to retire rich after 60. If you want liquidity and dip into the retirement corpus everytime you are short of cash, your corpus value will come down.

      Anyways - your concern is perfectly valid and it is a good idea - As long as you dont keep dipping into your retirement corpus every now and then.

      Happy retirement

      Delete
  5. Can you please guide me on the fund managers? Which of them would you recommend? Also, how do I approach them? I would rather meet a person in flesh and blood than download a form online. I stay in Chennai. - IB

    ReplyDelete
    Replies
    1. NPS is like any other ULIP/Mutual Fund where you cannot meet the fund manager. However, in case of NPS the Fund House is going to decide who manages the fund making it even harder to know who is managing our money.

      From past performance - Kotak and ICICI have been good.

      Anand

      Delete
  6. Dear Anand Kumar,
    I am a Private service holder.
    My salary is 18,000 per month.
    I am having already a PF account from my company in which they are deducting 780 per month.
    2 year back due to a request of my friend I had done NPS with a Rs 1,000. But as they had no ECS facility I did not go to deposit next investment amount ( which was Rs 500 per month).

    I do not know the status of that account.
    Do you suggest to pay the defaulter amount and to continue with that.
    I am having 1 Lic of Rs 3000 ( per quarter) and HDFC top 200 SIp ( Rs 1,000 per month)

    ReplyDelete
    Replies
    1. Soubhagya das,
      you have not mentioned about how much was the initial contribution you made. anyways, in the last 2 years, since you did not make any deposits, i dont think your account will be active right now. you can still check if it is active. Paying the defaulter fee is a good idea only if the fee is small. If it is too much and your amount invested is only Rs. 1000, it is not worth it.

      The details about your LIC policy and Mutual Fund SIP are not enough for me to advise on whether you should continue this scheme or not. But, anyways, any investment is a good idea as long as you are not borrowing to invest.

      Best wishes
      Anand

      Delete
  7. Hi Anand. I have recently opened a NPS account. According to your articles, 40 % of the amount taken as lump some after 60 years is not taxed. But I do not find such details in any of the NPS government links. I also called up the customer care and they also claim that the entire max 60 % of amount which is withdrawn after 60 years is taxable. So wanted your clarification on this. Please advice.

    ReplyDelete
    Replies
    1. Anonymous - Yes, the full amount withdrawn is not taxable. You can get more info in the offer document that you get from NPS. That document will have all the info you need.

      Delete
  8. after 60 years.. we need to buy annuity right?
    in case of death after annuity starts what will happen ?
    i mean .. if someone die at the age of 61, by that time annuity might have started already, will nominee get the entire amount ?

    ReplyDelete
    Replies
    1. No. The nominee will not get the entire amount. They will be given the full amount minus whatever annuity payments that happened during the first year.

      Delete
  9. i posted a query a few miutes ago, but i dont see it here now. i'll repeat it. my driver opened an nps a/c on 4/6/2014 with 500 rupees. tier-1, kotak, auto choice, E 42%,G 32%, C 26%.
    25/6/2014 17/7/2014
    Scheme Name Total Units NAV (Rs.) Total Value of Scheme (Rs.) Total Units NAV Total value
    KOTAK PENSION FUND SCHEME E - TIER I 8.7526 17.3858 152.17 7.2837 17.5229 127.63
    KOTAK PENSION FUND SCHEME C - TIER I 5.5909 16.9671 94.86 4.6526 16.9377 78.80
    KOTAK PENSION FUND SCHEME G - TIER I 8.0473 14.4212 116.05 6.6963 14.4771 96.94
    Total 22.3908 363.08 18.6326 303.38
    500 became 363 by 25/6 and 303 by 17/7. it seems it will disappear after some time!!! am i missing something? how can the number of units come down, only the nav should change. please throw some light.
    Mathew Thomas

    ReplyDelete
  10. Mathew - did your driver invest 500 rupees or enough money to buy 500 units? Each unit is not worth 1 rupee and the NAV changes. If todays NAV is 10 rupees, you will get 50 units for 500 rupees. If it is 20 rupees NAV you will only get 25 units for investing 500 rupees.

    Am not sure I fully understand your Q. can you elaborate please?

    ReplyDelete
  11. Hello Anand.

    Is there any difference in returns which is generated by tier 2 accounts with regards to the tier 1 account ?

    ReplyDelete
    Replies
    1. Hi - It depends. If you choose the same type of fund option for both tier 1 and tier 2 accounts, then the returns will be the same.

      Delete

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