New Pension Scheme ( NPS ) - will I invest?
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Chawanni Advice
Jun 27, 2009, 5:53:41 AM6/27/09
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This post is only applicable to private-sector employees since all
govt. employees ( who joined in or after 2004 ) are compulsorily part
of the NPS.
Although this is old news, NPS is now open for all to invest in it. Being a private sector employee, I have done an analysis whether I will invest in it or not. Hopefully it would be useful to all the readers of my blog as well.
My verdict is I will not invest in it right now. The reasons are explained below:
1. Charges are high: As explained in this livemint article although the fund management charges are very low, the other charges are very high atleast for the initial years. As the number of subscribers grow these fixed charges will also come down and then it will a right opportunity to enter. It is better to invest your retirement money in other avenues until you decide to open a NPS account and later on you can deposit this accumulated sum into your NPS account if you wish. You can check out the NPS welcome kit found here to see the fixed and other charges.
2. No clarity on tax benefits: An explained in this Value Research article, there are no tax-benefits of investing in the NPS. Let the govt come up with proposals on what tax-breaks it is ready to offer to NPS investors. Hopefully they would do it in the budget being presented in July, 2009.
3. The equity part stands limited to Nifty: They should have either allowed the fund manager's discretion in choosing the stocks for equity investments or chosen a broader index like S&P CNX 500. This I suggest for the following 3 reasons:
a) I'm afraid large amounts of NPS money flowing into just 50 stocks would surely create a bubble of sorts for the Nifty stocks ( which will burst one day!).
b) Secondly, the broader indices like S&P CNX 500 although being more volatile over shorter terms have always beaten the Nifty/Nifty junior when compared over a time-period of 10 years or more. Retirement money being (very-)long term money should surely benefit from it.
c) Thirdly, they have appointed several different fund management companies but if all have to invest in the same Nifty-50 stocks in the same proportion ( i.e. follow the index ) then what is the point of having several different fund management companies.
4. Relying on the rating agencies: Remember the rating agencies who had rated the sub-prime CDOs as AAA? As explained by Deepak in this article, the original proposal drafted by committee headed by Deepak Parekh had sought to make the rating agencies irrelevant by putting the onus on the fund manager. But PFRDA decided to reverse it and now atleast 75% of the investments done in corporate bonds must be rated by one of the rating agencies. Is it a wise move considering the present economic crisis, the world is going through, is partly caused by trusting these ratings? Also the rated company pays the rating agency, so if one rating agency refuses to give them a good rating, the company takes their business to another rating agency whoever offers them a better rating for their bonds. This is a conflict which must be resolved before relying on ratings for making investment decisions.
5. EPS 1995: And lastly the most important reason why I will not contribute to NPS is because I ( being a private-sector employee ) am already contributing to this scam known as EPS 1995 ( full details in this article ). The government must scrap the EPS 1995 scheme and all of employee's ( and employer's contribution also ) retirement money ( irrespective of govt. or private-sector ) must go into NPS. All the existing money being held by EPS 1995 scheme should also be transferred to the respective employee's NPS account.
I have adopted a wait-and-watch policy. What about you?
The original article can be found here:
http://chawanni.blogspot.com/2009/06/new-pension-scheme-nps-will-i-invest.html
Although this is old news, NPS is now open for all to invest in it. Being a private sector employee, I have done an analysis whether I will invest in it or not. Hopefully it would be useful to all the readers of my blog as well.
My verdict is I will not invest in it right now. The reasons are explained below:
1. Charges are high: As explained in this livemint article although the fund management charges are very low, the other charges are very high atleast for the initial years. As the number of subscribers grow these fixed charges will also come down and then it will a right opportunity to enter. It is better to invest your retirement money in other avenues until you decide to open a NPS account and later on you can deposit this accumulated sum into your NPS account if you wish. You can check out the NPS welcome kit found here to see the fixed and other charges.
2. No clarity on tax benefits: An explained in this Value Research article, there are no tax-benefits of investing in the NPS. Let the govt come up with proposals on what tax-breaks it is ready to offer to NPS investors. Hopefully they would do it in the budget being presented in July, 2009.
3. The equity part stands limited to Nifty: They should have either allowed the fund manager's discretion in choosing the stocks for equity investments or chosen a broader index like S&P CNX 500. This I suggest for the following 3 reasons:
a) I'm afraid large amounts of NPS money flowing into just 50 stocks would surely create a bubble of sorts for the Nifty stocks ( which will burst one day!).
b) Secondly, the broader indices like S&P CNX 500 although being more volatile over shorter terms have always beaten the Nifty/Nifty junior when compared over a time-period of 10 years or more. Retirement money being (very-)long term money should surely benefit from it.
c) Thirdly, they have appointed several different fund management companies but if all have to invest in the same Nifty-50 stocks in the same proportion ( i.e. follow the index ) then what is the point of having several different fund management companies.
4. Relying on the rating agencies: Remember the rating agencies who had rated the sub-prime CDOs as AAA? As explained by Deepak in this article, the original proposal drafted by committee headed by Deepak Parekh had sought to make the rating agencies irrelevant by putting the onus on the fund manager. But PFRDA decided to reverse it and now atleast 75% of the investments done in corporate bonds must be rated by one of the rating agencies. Is it a wise move considering the present economic crisis, the world is going through, is partly caused by trusting these ratings? Also the rated company pays the rating agency, so if one rating agency refuses to give them a good rating, the company takes their business to another rating agency whoever offers them a better rating for their bonds. This is a conflict which must be resolved before relying on ratings for making investment decisions.
5. EPS 1995: And lastly the most important reason why I will not contribute to NPS is because I ( being a private-sector employee ) am already contributing to this scam known as EPS 1995 ( full details in this article ). The government must scrap the EPS 1995 scheme and all of employee's ( and employer's contribution also ) retirement money ( irrespective of govt. or private-sector ) must go into NPS. All the existing money being held by EPS 1995 scheme should also be transferred to the respective employee's NPS account.
I have adopted a wait-and-watch policy. What about you?
The original article can be found here:
http://chawanni.blogspot.com/2009/06/new-pension-scheme-nps-will-i-invest.html
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