The Pension Fund Regulatory and Development Authority (PFRDA) has revised the pension fund management charge or investment management fee of the National Pension System (NPS) upwards.
Taking the guidelines on pension fund managers (PFMs) forward, PFRDA has allowed fund managers to levy an annual fund management charge (FMC) of up to 0.25% for various funds. The fund managers can begin levying this new charge from 1 November.
Currently, FMC is fixed at 0.0009% per annum. This charge was decided by PFMs themselves in 2009 at the time of bidding for NPS. But PFMs found it very difficult to sustain such low FMC. The poor uptake of NPS hasn’t helped either; so far about 120,000 people, including companies, have subscribed to NPS. Keeping that in mind, the regulator has now relaxed the fund management cost but has capped this cost to 0.25%. The fund management fee for NPS for government employees and NPS Lite meant for weaker sections, however, remains fixed at 0.0102% per annum.
Is NPS still attractive?
This year the regulator introduced two key changes to the charge structure of NPS.
Increase in remuneration for sales points: In January, PFRDA increased the first time registration fee from a flat Rs.20 to Rs.100. Additionally, it altered the fixed cost per contribution from Rs.20 to an ad valorem charge of 0.25% of the contribution amount. Under NPS, you need to contribute at least once a year. The sales point will pocket 0.25% of that amount as remuneration.
The idea was two-fold—to ensure that investors who contribute less do not suffer due to a fixed cost and distributors get a higher incentive to sell NPS. However, it may be noted that the minimum is still Rs.20. So an investor putting in Rs.6,000 per annum (the minimum contribution required in NPS) would still pay Rs.20 instead Rs.15 (0.25% of Rs.6,000). The maximum remuneration, however, is Rs.25,000.
Increase in FMC: The regulator has relaxed the fund management charge, capping it at 0.25%.
Despite the increase in charges, NPS continues to retain its low-cost reputation. For instance, a Rs.1 lakh contribution every year in a mutual fund with an expense ratio of just 1% will return Rs.1.46 crore in 30 years at an assumed growth rate of 10%. In NPS, you would be richer by about Rs.24.5 lakh over the same tenor and growth rate.
Should you invest?
NPS is a pure contribution investment product with a lock-in till 60 years of age. On maturity, you get 60% of the corpus as lump sum and the remaining 40% goes into buying an annuity or pension product.
“We continue to think that NPS is a good retirement investment vehicle. True, the new charge is many times the old charge, but 0.25% it still the lowest among all fund management charges for equity-based long-term investing. If assets grow significantly in the future, there is also a chance that this ratio would come down,” says Srikanth Meenakshi, founder and director, Fundsindia.com.
NPS is a low-cost retirement vehicle, which you must consider, but keep in mind that it allows you to invest only 50% of your money in equities; the rest goes in debt instruments. So if you are young and have an appetite for risk, you may be better off investing in a pure equity product such as mutual funds.