The New Pension Scheme (NPS), on the contrary to its impressive double-digit returns generated in FY’13 is expected to post a drastic fall in returns for FY’14.
Last year, NPS having the lowest fund management charge, had generated the highest returns. High bond yields this year would impact the returns for investors in the pension scheme for FY’14. The interest rate is inversely proportional to the price of a bond. If the yield of a bond goes up, its price falls. In FY’13, the yields had fallen, so bond prices went up. Therefore, there were mark-to-market (MTM) gains in addition to interest income. From June 2013, yields started rising. So, while, interest income would be there, there would be more MTM losses. Bond prices and interest rates are inversely proportional.
The weighted average returns for the government debt (G-sec) scheme for the private sector would be around 2-3% for FY’14 compared to 13.52% generated in FY’13. Similarly, the corporate debt scheme would give 5-6% return compared with 14.19% in FY’13, while the returns on central government and state government schemes would be in the range of 2-3% compared with 12.39% and 13%, respectively, in FY’13.
However, with the stock market doing well this year, the equity scheme for the private sector would give around 13-14% return, compared with 8.38% in FY’13.
Interest rate movements are cyclical and since NPS is a 20-year product, the losses get averaged out. With its lowest charges, NPS is likely to generate phenomenal returns over a longer period.
NPS was introduced by the central government in January 2004 for new entrants and was subsequently extended to all citizens from May 1, 2009. Pension Fund Regulatory and Development Authority (PFRDA) has chosen eight fund managers to manage NPS for private sector –SBI pension funds, UTI retirement solutions, LIC pension fund, Reliance capital pension fund, Kotak Mahindra pension fund, ICICI Prudential pension funds management, HDFC pension management and DSP Blackrock pension fund managers.
Under NPS, you can choose your fund manager and your investment option. In case if you does not want to exercise a choice, your money will be invested as per the ‘auto choice’ option, where money will get invested in various schemes as per your age.
NPS offers two options to invest money. The first one is ‘active choice’, where you can decide the asset class and their percentages.
Asset class ‘E’ invests predominantly in equity market instruments. Asset class ‘C’ invests in fixed income instruments other than government securities and asset class ‘G’ invests in government securities. You can choose to invest your entire pension wealth in ‘C’ and ‘G’ asset classes and up to a maximum of 50% in ‘E’ under ‘active choice’ option. You can also distribute the pension wealth across E, C and G asset classes, subject to conditions.
The other option is ‘auto choice’, which offers an easy option for individuals who do not have the required knowledge to manage their NPS investments. Under this, the investment will be made in a lifecycle fund.
According to this, at the lowest age of entry (18 years), it will entail investment of 50% in ‘E’ class, 30% in ‘C’ class and 20% in ‘G’ class. These ratios of investment will remain fixed for all contributions until the individual reaches the age of 36 years. From age 36 onwards, the weight in ‘E’ and ‘C’ class will decrease annually and the weight in ‘G’ class will increase annually till it reaches 10 % in ‘E’, 10% in ‘C’ and 80% in ‘G’ class.