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NPS Adds Two New Investment Options. Are They Worth Your Funds?
Sep 26, 2016

Retirement Planning is one of the most crucial areas of financial planning. The right strategy guarantees a relatively stress-free retired life, which may span over 40 years. Most individuals turn a blind eye to this need and start seriously saving when they are just about to retire! The "chalta hai" attitude hurts an investor deep without realising until it's too late.

These fears are validated by the recent surveys conducted by Aegon Centre for Longevity and Retirement, Willis Towers Watson and Natixis Global Asset Management.

Here's a summary of these surveys...

  • Aegon Retirement Readiness Survey and the Willis Towers Watson Survey found many Indians worrying about their retirement.
    • On an average, Indian employees are on the course to only achieve 71% of their income needed at retirement
    • Only 51% of employees were found to be habitual investors who saved regularly for their retirement
  • Among the 43 countries that were surveyed, India ranked at the bottom in the annual Global Retirement Index (GRI) developed by Natixis Global Asset Management.
    • Of these 43 countries (they excluded Pakistan and Bangladesh); Norway took top honours, followed by Switzerland and Iceland. United States of America (USA) took the 14th position.
    • The survey highlighted that post-retirement life in India can be extremely difficult. So much so that it is possibly the world's worst country to retire in.
    • India fared worst in the Quality of Life index too.

India is the world's worst country to retire-Global Retirement Index

Among challenges such as these, how does one go about planning for retirement?

National Pension System (NPS) may be an answer to the daunting question.

Pension Fund Regulatory Development Authority (PFRDA) was set up by the Government of India to regulate and develop the Pension sector. Its purpose is to protect the income security of senior citizens. And, it does so through the National Pension System (NPS).

As on 30th July this year, 2,652 corporates with 5,04,019 subscribers are registered under NPS. The contribution received from the corporate subscribers was Rs 9,168 Crore against which the Asset Under Management (AUM) was Rs 11,206 Crore.

To attract more investments from the private sector, PFRDA has proposed to offer a couple of additional investment options.

The new investment options will be called--Aggressive Life Cycle Fund and Conservative Life Cycle Fund.

In the Aggressive Life Cycle Fund, an investor can invest up to 75% in equities. Whereas, the Conservative Life Cycle will allow 25% fund allocation to equity.

The purpose of these additional investment avenues is to attract young investors who can afford to take the risk and on the other hand risk-averse investors.

The current investment option will be called Moderate Life Cycle Fund and would continue to allocate 50% to equity.

Although, the proposed investment options are a welcome move, they come with their own set of challenges.

Under the new investment schemes, the exposure to equity (as mentioned above) would be restricted till the age of 35. After this, the allocation will be gradually tipped towards debt.

For example, after reaching the age of 35, the portion of equity would be reduced by two percentage points and corporate bonds by one percentage point, in case of aggressive life-cycle funds. The allocation to government bonds would rise to three percentage points, every year till the age of 55.

The same will be done on proportionate basis for Conservative Life Cycle Fund.

The regulator is considering permitting subscribers to invest in alternative investment funds (e.g. real estate investment trusts or units of infrastructure investment trusts etc). A subscriber may have an exposure up to 5% in such funds.

At present, this choice is given to a fund manager and not a subscriber. A fund manager can invest up to 2% of the pension fund corpus in alternative investment funds.

To Conclude...

The new investment schemes are a positive change and may further encourage investors to subscribe for NPS.

At PersonalFN we believe that, the age limit on equity exposure under the proposed investment options should be increased. In fact, individuals within the age of 35 to 45 tend to save more for their retirement in comparison to those below 35... and can afford to take risk supported by their high income.

Moreover, under the present scheme, it is mandatory to purchase an annuity on retirement. An annuity generates paltry returns, isn't competent to beat inflation and is taxable.

If investing in a NPS appeals to you, make sure you aren't completely dependent on it. A judicious asset allocation is required to earn maximum returns during the golden years. Hence, consider other wealth creating investment avenues that can help you plan your retirement well.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


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