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Business News/ Money / Calculators/  Time to up your equity investment in NPS?
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Time to up your equity investment in NPS?

With the pension regulator increasing the equity investment limit from 50% to 75% in NPS, investors need to check all aspects before increasing their equity exposure

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You can now invest more in equities through the National Pension System (NPS). Earlier this month, the Pension Fund Regulatory and Development Authority (PFRDA) increased the limit of equity investment in the system, from 50% to 75% by introducing two new life-cycle funds. A life-cycle fund follows a pre-determined asset allocation plan based on your age. PFRDA has also carved out a separate asset class for alternative investment funds (AIFs). So, should you increase your allocation to equity in the NPS? Mint Money finds out.

Two new life-cycle funds

NPS now offers four schemes:

—Scheme G invests in government securities,

—Scheme C in fixed income instruments other than government securities,

—Scheme E in equities (limited to 50%) and

—Scheme A, the latest, in AIFs (you cannot put more than 5% in them).

In terms of choosing your asset allocation, you can adopt two strategies. The active choice lets you invest in any of the four schemes in the proportion you want, subject to overall caps.

The auto-choice option adopts a life cycle-based approach and is meant for those who need help in deciding their asset allocation. It starts with maximum exposure to equity in the younger days, which tapers as you reach retirement. Till now there was only the ‘moderate’ life cycle fund. Here, till 35 years of age: 50% of your money is invested in scheme E, 30% in scheme C and the balance 20% in scheme G. The equity allocation tapers every year till you are 55 years of age. It then remains fixed at 10% in scheme E, 10% in scheme C, and 80% in scheme G.

The Bajpai committee, set up to review the investment pattern of the NPS, was of the view that investors should be able to put all their money in equities. The committee recommended a roadmap spanning 6 years, divided into three phases, to allow full equity exposure. It recommended allowing an increase in equity to 75% through the life-cycle fund in the first phase, then 75% allocation in the active choice and finally lifting the cap altogether.

By introducing two life cycle funds, PFRDA has acted on the recommendations for the first phase: an aggressive life cycle fund with equity allocation of 75% till 35 years of age, and a conservative life cycle fund with equity allocation of 25% till 35 years of age. The aggressive fund tapers to 15% in equities at 55 years of age, whereas the conservative fund tapers to 5%.

Some feel that even as the equity allocation has been increased, much is left to be desired. “The maximum allocation to equity, of 75%, is at 35 years of age. Most customers who join NPS are in the 40-45 age group and the maximum equity allocation for them is 35-55% in the life cycle funds. Around 60% of our customers opt for life cycle funds," said Sumit Shukla, chief executive officer, HDFC Pension Management Co. Ltd. “So, the two new funds are welcome but a greater allocation to equity in the active choice (funds) should be considered," he added.

“At 50, the maximum exposure to equity through the life cycle fund is just 20%. At 50, a person has 10 more years to plan for, and a higher equity exposure is definitely recommended," said Nikhil Vikamsey, partner, Alpha Capital, a wealth planning company.

The new life cycle funds are sure to find takers. “Life cycle funds are good for those who want minimum intervention and things to happen on autopilot...this will work well (for many people)," said Suresh Sadagopan, founder, Ladder7 Financial Advisories.

The new asset class

PFRDA has introduced a new asset class of AIFs. “Earlier this year we were allowed to invest in AIFs up to 2% within the equity portfolio, but nobody invested because the ticket size is huge and there are liquidity issues as these funds are closed ended," added Shukla.

As per the notification, alternative investments will include products regulated by the Securities and Exchange Board of India (Sebi), such as: units issued by real estate investment trusts (Reits), asset-backed securities, and units issued by infrastructure investment trusts. They will also include commercial and residential mortgage-based securities. “Allowing AIFs is like opening a part of the financial universe that’s opaque. One knows where the money is invested but has limited understanding about the valuation of these assets," said Deepali Sen, founder, Srujan Financial Advisers LLP. “While AIFs may offer the upside of higher returns, a 5% exposure is at best symbolic."

Given the small exposure to AIFs, fund managers are finding it hard to invest in them. “The ticket size of AIFs allowed by PFRDA is at least Rs100 crore, so it will be sometime before we can invest in these funds," said Shukla. Shailendra Kumar, managing director and chief executive officer, SBI Pension Funds Pvt. Ltd, said there aren’t enough investment opportunities in the AIFs and being closed ended funds there are issues of liquidity. “We don’t recommend an exposure of more than 5% as this is a volatile asset class. One should understand this asset class and have an appetite for it. For an average investor, equity is the best bet for long-term returns," said Vikamsey. Even as increased equity allocation is a good move, financial planners see two major roadblocks. Maturity proceeds are still not completely tax free and, one has to annuitise 40% of the corpus on maturity.

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Published: 27 Nov 2016, 11:57 PM IST
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