A few years back, pension fund regulator PFRDA (Pension Fund Regulatory and Development Authority) introduced National Pension System (NPS) to provide old age income. An online facility, NPS is portable. You can operate your account from anywhere in the country, even if you change your city or job. The product also provides tax benefit up to Rs. 1 lakh is available under Section 80 CCD. Any individual between 18 years to 60 years who is citizen of India can enroll in NPS. Even an NRI can enroll for NPS.
However, the product has not gained much popularity among investors due to lack of awareness and liquidity constraints.
According to Keyur Shah, director-knowledge management, Vantage Institute of Financial Markets, NPS is a simple and transparent product. Apart from promoting fee-based financial planning, there is a strong need to support financial literacy among people to attract investments in NPS.
If you want to withdraw before 60 years of age from your NPS account, then you can withdraw 20% of the accumulated amount and remaining 80% of the corpus is used (at the age of 60) to buy a life annuity from any IRDA–regulated life insurers.
On attaining the age of 60 years, you would be required to invest minimum 40% of your accumulated savings (pension wealth) to purchase a life annuity from any IRDA-regulated life insurers. The remaining 60% pension wealth can either be withdrawn in lump sum on attaining the age of 60. In case of death of a subscriber the entire accumulated wealth can be made payable to the nominee.
Thus, entire corpus cannot be withdrawn from NPS by the subscriber. Also, loan facility is not available under NPS. People’s requirement for funds changes over a period of time and liquidity is definitely an important aspect while making investments in a product. NPS discourages people from premature withdrawal out of their retirement corpus so the product lacks liquidity at the time of urgent needs, said Amit Sethi, owner, Amvi Financials.
Pankaaj Maalde, head-financial planning, ApnaPaisa.com, said, “Indians generally invest for short tenure and prefer easy exit. Most Indians don’t like to lock-in their investments for a very long period and therefore prefer to stay away from NPS. We do not recommend NPS because it’s neither flexible nor transparent. We would also like to compare performance of the NPS before advising it to our clients, which at present is not available easily.”
When it comes to a pension product, Indians generally prefer stability of earnings and some guarantee of returns on their investments. NPS does not provide guaranteed returns; hence it could not draw large number of retail investors, pointed out Nozer Damania, research analyst, Personal FN.
“Indians surely invest some part of their savings in long-term products such as insurance. NPS is not much popular as there is no awareness about this product among people. Distributors do not get good monetary benefits like they get for insurance plans. To promote this product more awareness campaign programmes should be conducted in semi-urban and rural regions. NPS is a safe product as it is regulated by PFRDA, with transparent investment norms and regular performance review of fund managers by NPS Trust. The product does not have any hidden charges,” explained Pravin Chordia, product manager-financial products division, India Infoline.
Jimmy Patel, CEO, Quantum Asset Management Company Pvt Ltd, “NPS has a feature which looks rewarding, but lack of awareness among investors could be one of the reasons that the scheme couldn’t meet with the expected success. However, the new regulation of the scheme allows the increase in the number of fund managers which may not immediately increase the lower penetration of the scheme and therefore the base. Also, the product needs to be marketed in better way to reach to potential investors and to spread awareness about investments that helps build a decent corpus for retirement annuity. By Investing in NPS, investors can get a chance to choose the fund manager and even the investment profile they would like depending on their risk appetite.”
Mr Damania stressed, “Adequate promotional activities should be undertaken in the right spirit without indulging into tall claims. An educative advertisement would also help inculcate awareness among investors. Prompt customer service from the pension fund managers (PFMs) would also go a long way in building long-term relationship with investors.”
“NPS has adequate transparency as it provides complete information about fund allocation, disclosures, etc. Many investors are not clear about the process of investing in NPS and the unorganised sector is totally deprived of such investment products. A major part of India’s population works in the unorganised sector. It is very important to create a system where employees working in unorganised sectors are included under NPS,” added Mr Sethi.
NPS is not a complex product to understand for a lay investor. However, the options available under the scheme should have thorough explanation so that it is easy to understand and take a decision as to which option to choose for. There should be enough assistance provided to a lay investor in selecting the right option from the various options available under the NPS depending upon his risk profile, Mr Damania said.
Some agents and distributors usually label NPS as a ‘complex’ product to discourage people from investing in it. They instead promote products on which they get good commissions, highlighted Manikaran Singal, CFP, Chandigarh-based Marvel Investments.
“Compared to other investment options, NPS does lack transparency. In case of most financial products investors can generally go through past track records of various schemes available online. However, information on NPS is not readily available and in many cases PoS (point of sale) representatives are also not aware about the minute details, added Mr Singal.
PFRDA recently relaxed the guidelines for registration of PFMs. According to the revised guidelines, PFMs are now allowed to prescribe their own fee charges, subject to an overall ceiling to be laid down by PFRDA. It is expected that this would provide for an economically viable business model for the PFMs attracting a fresh set of entrants into the pension industry, and the resultant competition would ensure market driven fee structures, which would work to the advantage of the pension subscribers. The terms of the pension fund managers will end in October and then they will have to register afresh under the new guidelines.
Speaking about fund management charges (FMCs), Mr Damania added, NPS also couldn’t take off due to very low fund management fee of 0.0009%—Rs. 9 per year for handling a corpus of Rs. 10 lakh. It is important that the PFMs find the business economically viable. Though the revised guidelines have raised this issue of low management fees and proposes to increase the same, awareness about NPS still needs to be created among retail investors. NPS should provide regular updates on the performance of the scheme under various options available to investors. Moreover, there should be adequate disclosure on the portfolio of assets under the various options available and that too at regular intervals.