The investment horizon of NPS is significantly longer than that of mutual fund investments and the applicable regulatory guidelines are also different says Meghana Baji, CEO and CIO of ICICI Prudential Pension Funds Management Company. In an interview with FundsIndia, Baji highlights the edge that NPS has over other pension products.
What edge does NPS have over other pension products?
The key features which differentiate NPS from other pension products are: Portability, Simplicity, Flexibility, Low cost and Tax efficiency
• Portability: Retirement account (PRAN) can be retained across employers and locations
• Simplicity: Simple, standardised product designed by PFRDA
• Flexibility: Choice of funds (Equity, Corporate Bonds and G-Secs), PFMs and Points of Presence (including banks and other distributors)
• Low cost: Lowest cost investment product currently available in the market
• Tax efficiency: Employers contribution to NPS up to 10% of salary (basic +DA) is exempt from tax under 80CCD
The tax efficiency of NPS combined with simplicity and portability give NPS an edge over competing products.
Will the revised guidelines for NPS have an impact on portfolio performance going forward?
The revised guidelines recommended by PFRDA would help in further controlling the risks associated with the portfolio. Additionally it would help to further diversify the portfolio and ensure stable returns over a long term.
Did you change your equity portfolio after the revised guidelines?
Investments made after the revised PFRDA guidelines came into effect comply with the new norms.
What is the portfolio turnover of your equity fund?
Historically, the equity portfolio was managed as an index fund replicating the Nifty 50 index, hence the turnover was low at 0.03% during FY2013. However post the revised PFRDA guidelines which require active management of the equity portfolio, we expect the turnover to increase in the future.
Do you intend to take exposure to mid-cap stocks (which are in the derivative segment) or stick to large-caps? What proportion of portfolio would have midcaps at present?
Since our equity fund was managed as an index fund till recently, the current equity portfolio has no exposure to mid-cap stocks. However, going forward, we may review the portfolio to include a few investments in fundamentally strong mid-cap companies. However, considering that the portfolio belongs to a long-term pension product, the intent is to carry higher exposure to large-caps.
Your gilt fund has a 17-year average maturity. Is this not high risk? Would this number drastically change in 6 months to a year when rates fall?
Considering the design of the NPS product, most of the subscribers are expected to stay invested in till their retirement age of 60 years, resulting in an average investment horizon of 20 – 30 years for the subscribers. The high average maturity of our gilt fund is in line with the nature of the product and its long-term investment horizon.
However, we would review the portfolio regularly depending on market conditions and our internal research findings.
How differentiated would your NPS strategy be (within the regulatory ambit) when compared with ICICI Pru mutual funds?
Considering that NPS is a long term pension product, the investment horizon of NPS is significantly longer than that of mutual fund investments. The applicable regulatory guidelines are also different.
The new PFRDA guidelines set limitations on exposure to a company, industrial sector and group. Accordingly, our investment strategy would be considerably different as compared to mutual funds.
As a pension fund, our equity fund would make long-term investments in fundamentally strong companies and therefore is expected to have a lower churn. Our debt fund would focus on investing in companies with high credit quality and would have longer maturity in line with the nature of the product.
What according to you would be an ideal asset allocation (between Schemes E, C G) for somebody who has 15-20 years to go for retirement?
The NPS product provides for auto choice for life cycle based asset allocation. Under this option, the asset allocation suggested by PFRDA for subscribers aged 40-45 years is as follows:
Equity (E Scheme) – 30% to 40% ; Credit risk bearing (C Scheme) – 20% to 25%; Government securities (G Scheme): 35% to 50 %
While the above asset allocation may be treated as a generalised guidance, it is recommended that each NPS subscriber assess their own risk appetite and decide the long-term asset allocation accordingly.
How would you differentiate ICICI Pru’s pension fund when compared with other PFMs?
ICICI Prudential Pension Funds Management offers an integrated one-stop-solution to NPS subscribers. Customers can select ICICI Prudential Life Insurance as the annuity service provider. Moreover, our regular engagement with corporates whose employees are registered with us for NPS can leverage this integrated set-up.
This makes our NPS offering a more compelling proposition for subscribers. Additionally, an e-module and an online registration process for subscribers are added benefits.