Tuesday, September 10, 2013

ENHANCEMENT OF CASH CONVEYANCE LIMITS - DRAFT PROPOSAL BY DoP








National Pension Scheme funds hit by

 downturn


The passing of the Pension Bill in the Lok Sabha is good news
 for investors in theNational Pension Scheme (NPS). But the news 
from the market is not very heartening.NPS funds have churned 
out losses in the past year. While the NAVs of the schemes 
may be higher than the September 2012 levels, the point-to-point returns 
hide the true picture.

Most NPS investors, including the 30 lakh central and state government 
employees, who are compulsorily a part of the scheme, are SIP investors 
and their returns should be calculated accordingly. We looked at the 
SIP returns of NPS funds in the past year and found that most of them were 
in the red.

The NPS funds for government employees have, on an average, lost 2.45%
 in the past year. However, you can't blame the downturn in the equity market. 
Most of the losses are due to the steep 12-15% fall in government bond prices
 in the past three months. The NPS funds for government employees are allowed
 to invest up to 15% of their corpus in equities, but no fund has hit that ceiling.

The SBI Pension Fund, the worst performing fund for government employees, 
had only 6.83% of its corpus in stocks as on 30 June 2013. The UTI Retirement
 Solutions had only 7.75% in stocks as on 28 March 2013. Both the schemes had 
almost 50% in government bonds, most of them long-term instruments. The 
long-term bonds declined steeply in July-August, when the RBI introduced 
measures to stabilise the rupee.

It is not clear how much the investors have lost due to the equity exposure or
 allocation to bonds over the past year because the investment mix keeps changing. 
Besides, not all pension funds have disclosed the portfolios of the schemes they run.

However, the returns of the NPS schemes for the general public offer some clues 
on how investments have performed in the last one year. The G class funds, 
which invest only in government bonds, have generated very poor returns 
(see table). Far from cushioning the portfolio against volatility, the government
 bonds have infused greater risk in the portfolios. The gilt funds of only two
 pension fund managers, Kotak Pension Fund and ICICIBSE 7.37 %Prudential 
Pension Fund, performed better than their equity funds. The SBI Pension Fund's 
gilt fund has been the worst performer in the past year.

Long-term returns also hit


You could say that one year is too short a duration for judging a scheme in 
which one has invested for the long term, possibly 20-25 years. However, 
the downtrend in stocks and bonds has also impacted the long-term
 returns of the NPS schemes. Though the historical NAV data for all pension
 fund managers is not available, we managed to get it for UTI Retirement Solutions.

The past five year SIP returns of the pension scheme for central government 
employees is 6.34%. The 3-year and 4-year returns of the two other pension 
fund managers (see graphic) are also far below the 8.67% that the Employee 
Provident Fund has offered.

Corporate bonds to the rescue


Corporate bonds have managed to salvage the 
returns of the NPS schemes. In the past year,
 the returns of C class funds have been flat, 
but over the past four years, they have given
 more than 8%. The ICICI Prudential Pension Fund's
 corporate bond scheme has been the best perfor
ming C class fund, with SIP returns of 8.84% since
 its launch in June 2009. However, these bonds
 are not considered as safe as government bonds.

The poor returns come at a time when the 
economy is floundering. Some experts say the equity
 markets can fall further and recovery can take years.
 The good part is that bond prices are expected to 
recover in the medium term as the rupee stabilises 
against the dollar and interest rates subside. NPS investors should rejig their
 allocation to equities, corporate bonds and gilts according

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