All about the New Pension Scheme (NPS) in India

Salient Features:

Eligibility: Any Indian Citizen can invest

Minimum Investment per year: Rs. 6000/- Maximum: No limits

Tax Exemption: Up to Rs. 1 Lakh under section 80C

Term of the investment: Suitable only for the long term (Pension), for average, individual investors. Not recommended for short-medium term investments or speculation.

Risks: Investment subject to market risks, but cushioned to an extent by the investment in GOI Bonds and the % exposure (not to exceed 50%) in equities.

Who is the Regulatory Body?

Pension Fund Regulatory and Development Authority (PFRDA)

The investor's account will be maintained by a record keeping agency appointed by the PFRDA.

Who are the Fund Managers?

The fund will be managed by six fund managers, appointed by the government at annual fees of 0.0009% of the invested amount, which is less than one paise per Rs 100. The fund managers appointed by the PFRDA are SBI, UTI Asset Management, ICICI Prudential Life Insurance, Reliance MF, IDFC Mutual Fund and Kotak Mahindra.

How/when do I get the investment back?

Money invested in the pension fund during the your working life will come back partly as a lump sum and partly as an annual payment or pension.

How are my funds Allocated and Risks Managed?

The fund gives investors the option of deciding what level of risk they want to take, given the fact that higher returns are typically associated with higher risk investments. The fund will be invested in three kinds of assets — equity, government bonds and corporate bonds — and it is for the investor to decide how much should be invested in each of these.

Investment in equity is, however, subject to two significant constraints.

(1) It cannot be more than 50% of the amount in the investor's account.

In my opinion, This clips the level of risk exposure but it also can be found to be very conservative and limiting specially for people who are young and who can afford to take more risks.

(2) Fund managers cannot invest in shares of individual companies, but only in index funds linked to the BSE's sensex or the NSE's Nifty.

In my opinion, this is really a great idea. It has been historically and consistently proven that over a real long term (say 25-30 years), Index funds have outperformed other types of funds consistently, although they are vulnerable to all market risks. Very low overheads and fees are involved in Index funds, which means more of your money goes to work efficiently. In fact, they are the best vehicles for average investors wanting to invest in stocks.

For those who would rather leave it to experts to decide what the balance should be, there is `auto choice' option. Under this option, for those aged 18-36, 50% of the amount in their pension account will be invested in equity, 30% in corporate bonds and the remaining 20% in government securities. From age 36 onwards, the proportion of investments in equity and corporate bonds will decrease annually while that in government securities will increase till the mix reaches 10% in equity, 10% in corporate bonds and 80% in government securities at age 55.

How do I open a pension account?

Approach the branches of any of the 22 `point of presence' (POP) service providers selected by the authority. These include State Bank of India and all its seven subsidiaries as well as ICICI Bank and Punjab National Bank. PFRDA.

Who will I have to deal with for my day to day transactions?

You (the investor) will need to interact only with the POP, where you can deposit your monthly, annual contribution.

What if I want to change my fund manager?

You have the option of shifting from one fund manager to another, merely by instructing your POP to do so. The POP will inform the same to the record keeping agency, which will shift the fund to the new fund manager, selected by you.

What if I have additional questions?

Please contact the nearest branch of SBI or affiliates, ICICI, UTI Asset Management, ICICI Prudential Life Insurance, Reliance MF, IDFC Mutual Fund or Kotak Mahindra.