NPS is a long-term investment with very low costs, low risk profile: Rahul Bhagat, CEO, DSP Pension Fund It is like a fixed deposit for the rest of your life. An annuity does away with the reinvestment risk and the risk of longevity. At least some part of the retirement portfolio should generate a fixed and assured income, Rahul Bhagat tells Babar Zaidi
It is a long-term investment, has very low costs and comparitively low risk. Investors should look beyond tax and invest more than the deduction limit, Rahul Bhagat, CEO of DSP Pension Fund tells ET Wealth.DSP has returned to the NPS after several years. What made you come back?
The pension market has matured and the regulatory framework is more robust now. Instead of applying for a licence every five years, we now have a perpetual licence. The very low charges have also been revised. The charges are still quite low, but enough to make the business viable in the long term. All this gives us confidence to stay in the business for the long term.
What makes the NPS a better product than other retirement options?
The NPS offers everything that one looks for in a retirement savings product. It is a long-term investment with very low costs and a low risk profile. The investor can start at 18 and remain invested in the scheme till the age of 75. The NPS is also the cheapest product available in the Indian market. The investor pays 0.03-0.09% per year, which is very low compared to what mutual funds and insurance companies charge.
NPS is also low risk because of the tightly regulated environment and the investment approach of the pension fund managers. Pension funds have to declare their portfolios to the PFRDA on a monthly basis.
That apart, the NPS equity funds invest in the top 200 companies, which is a safer universe than the broader market. The gilt funds invest in government bonds where there is no risk of default. Corporate bond funds have a higher risk profile than gilts, but the PFRDA allows funds to invest only in bonds with a minimum rating of AA, though DSP Pension Fund doesn’t go below AA+.
NPS equity funds can now invest in stocks beyond the Nifty. Would this enhance the risk or deliver higher returns for investors?
Looking beyond the index stocks, also, NPS is a long-term product and unlike mutual funds, the pension funds do not face the possibility of redemption pressure. Pension fund managers can therefore invest in very long-term bets in which they have conviction.
Note: Some part of the retirement portfolio should generate assured income for the retiree. That is exactly what the 40% put in the annuity does.
The top five stocks in the equity portfolios of all pension funds are very large-cap stocks. But your equity fund also has Coramandel International among the top five stocks.
We follow a strategy of a concentrated portfolio. If we have conviction in a stock, we will invest in it and hold it for the long term. We generally prefer companies with zero debt, because such stocks tend to do well in the long term.
NPS offers several advantages to investors, yet very few people (barely 10% of the total investing population in India) have invested in it. Why are people staying away from the NPS?
The commitment for a long term investment is not there. Investors seek liquidity in investments and a window for withdrawal. The NPS is a very good product and will benefit the investor, but people are psychologically averse to putting money in a scheme that they can’t touch till retirement. Just like Mutual Funds Sahi Hai, we need a campaign saying NPS Zaruri Hai.
Also, there is a serious lack of awareness about the NPS. For instance, not many people know about the tax benefits offered by the NPS. One can withdraw 33% of the superannuation fund and the remaining 66% is annuitised. But if you transfer the superannuation corpus to the NPS, you can withdraw 60% tax-free and only 40% will go into annuity.
Similarly, one can build a big corpus using the NPS Tier II. If there is a shortfall in the retirement savings, the NPS Tier II can be transferred to the NPS Tier I account.
We note that many investors invest only Rs.50,000 a year in NPS to avail tax deduction. That won’t build a sufficient corpus. Should the deduction limit be raised to encourage people to invest more?
It is true that Rs.50,000 a year will not create a big enough corpus. But even if the limit is raised to Rs.2 lakh, that won’t help build a sufficient corpus. People must look beyond taxes when saving for their retirement. We are going to live longer than earlier generations and expenses will be higher in the future. Longevity will rise to about 85 years in the future, so a person must save to sustain 20-25 years in retirement.
The compulsory annuity of 40% of the corpus is a sore point for many investors. What are your views on this?
Annuity should not be a sore point, because it offers a fixed and assured income for life. It is like a fixed deposit for the rest of your life. An annuity does away with the reinvestment risk and the risk of longevity. At least some part of the retirement portfolio should generate a fixed and assured income. That is exactly what the 40% portion put in the annuity does for you.
There is another positive point about annuities. Indian parents tend to get sentimental when it comes to children and spend their retirement savings on their goals. As a result they often are left to fend for themselves in their old age. An annuity ensures that the retiree gets a fixed income for life.
The Author is Rahul Bhagat CEO, DSP Pension Fund
This story originally appeared on: India Times - Author:Faqs of Insurances
