NPS , New Pension Scheme , A detailed Explanation

Today we will be talking about the “New Pension Scheme” Launched by Govt. of India.

What is NPS?

Its a pension system recently launched by Govt of India from 1st April, 2009.. You can regularly invest your money in this and get a lump sum at your retirement and a fixed monthly income for the lifetime . It will work almost the same way as Private Pension Schemes.

new pension scheme

Until now the pension schemes was available to Govt employees and employees of Big companies who has Provident fund facility. Any other person had to go with Private Pension schemes provided by Insurance Companies. IT as not a govt scheme for common person, With NPS now its a common person gateway to Pension Schemes.

Read previous post which was a guest post by Nooresh Merani on “How does a day trader looks like”Features

– No upper limit of Investment
– Minimum limit of 6,000 per year (Rs.500 per month).
– Annual Fees of .00009% (90 paisa for Rs.10,000) for Managing the fund.
– Tax benefit under sec 80C.
– Any Indian citizen between 18 and 55 years can invest in NPS.

Read other details below.

NPS Bodies

– Regulator : The one who will regulate the NPS System .
– Fund Managers : Who will invest the money
– Point of Presence : Responsible for Sales and Marketing .
– Central Record Keeping Agency : Responsible for all the document Keeping work (Record Keeper)

Lets see each of them In detail now .

Who will Regulate NPS?

PFRDA(Pension Fund Regulatory and Development Authority) will monitor and regulate all the activities under NPS. It checks how your money in invested and makes sure that the fund managers are following the rules and guidelines.

Its just like “SEBI for Stock Market” .

Who are the Fund Managers?

There will be 6 Fund houses appointed by Government to manage the funds under NPS. You can choose any one of them to be your Fund Managers. They are :

1. SBI Pension Funds Private Limited.
2. UTI Retirement Solutions Limited.
3. ICICI Prudential Pension Funds Management Company Limited.
4. Religare Pension Fund Limited.
5. IDFC Pension Funds Management Company Limited.
6. Kotak Mahindra Pension Fund Limited.

They will take all the decisions of where the money received under NPS should be invested in the best possible way considering all the rules and regulations set by PFRDA.

Watch this video to know about national pension scheme:

Who are Point of Presence?

The following entities have been approved by PFRDA for appointment as Points of Presence (POPs) under the New Pension System for all citizens other than Government employees covered under NPS.

1. Allahabad Bank
2. Axis Bank Ltd
3. Bajaj Allianz General Insurance Co Ltd
4. Central Bank of India
5. Citibank N.A
6. Computer Age Management Services Private Limited
7. ICICI Bank Ltd
8. IDBI Bank Ltd
9. IL&FS Securities Services Ltd
10. Kotak Mahindra Bank Limited
11. LIC of India
12. Oriental Bank of Commerce
13. Reliance Capital Ltd
14. State Bank of Bikaner & Jaipur
15. State Bank of Hyderabad
16. State Bank of India
17. State Bank of Indore
18. State Bank of Mysore
19. State Bank of Patiala
20. State Bank of Travancore
21. The South Indian Bank Ltd
22. Union Bank of India
23. UTI Asset Management Company Ltd

Who will be the CRA?

As per the website of PFRDA there is a Contact of negotiation is underway and NSDL is expected to be appointed as the CRA. there were other bodies too who wanted to be CRA, but the most suitable of all is CSDL. You can see them as the back office for maintaining records, administration and customer service functions.

What are the Steps of Investment?

Visit a point of presence (PoP), fill up the prescribed form with the required documents.
Once registered, CRA will send you a Permanent Retirement Account Number (PRAN). This will be unique to every person.
Select your Amount and Investment Option.

Investment Options and Structure

Structure wise they are very similar to ULIP’s or ULPP’s from Investment Point of View . You have different kind of funds options with different exposure to –

– Equity Instruments
– Corporate Debt
– Fixed Income Instruments
– Govt Securities.

Different Options

– Risky option : The higher allocation in this option will be in Equity. To decrease the risk, Equity Investment is allowed only to invest in Index funds which tracks Sensex or Nifty. Also the equity exposure is caped at 50%.

– Moderate : IN this options Main exposure would be Corporate debt and Fixed income securities with some exposure in Equity and Govt securities. It will be moderately risky and rewarding.

– Safe : In this option mainly the investment will be done in Govt securities, and very little will be invested in Equity.

There will be a Default option , under which the allocation will be decided as per your age, where Equity Allocation will be high in the start and then it will come down as your age increases . You can also decide your own asset allocation as per your Risk appetite

Cost

There are different kind of Costs in NPS.

– Fund management charges of .0009% per Annam, which is excellent if compared to ULPP’s or Mutual funds charges .

– Annual Maintenance charges of Rs.350 and Rs.10 per transaction to CRA (soon, it will be Rs.280 per year, Rs.6 for per transaction).

– Rs.40 for registration with PoP and Rs.20 per transaction with them.

– There are other small costs too, lets leave it for now.

Taxation Issue

Sadly, As per the current law, the amount received at the end from NPS would be taxable, PFRDA is trying hard with govt to exempt the tax. You will get the 80C benefits on the amount invested in NPS.

UPDATE May 3, 2009

“Under following circumstances your account may be closed before attaining retirement age?

– death
– account value reduces to zero
– change in citizenship status.

Thanks to Viral for bringing up this point
Read NPS FAQ here

Conclusion

As per my views, Its a good initiative from Govt to introduce a Pension Scheme which will give common people a chance to invest in Pension schemes which is from Govt.

One important thing to understand and note is that Even though its a pension scheme, the returns are not guaranteed. It can vary drastically depending on your asset allocation and how you choose the fund options.

Other Negative point at this point is that the amount received at the end would be taxable which can have adverse affect on the return potential. But I am sure soon govt will make the final amount received non-taxable.

Currently I don’t rate it at par with PPF or EPF. At this point it would be wise to invest money in this if you have any money left over after your PPF and EPF contribution. Waiting for some more time before taking a call on this would be worthwile . Overall NPS passes 🙂

Question for you

– Are you personally impressed by NPS and will you invest in NPS?
– What else govt can make changes in NPS to make it attractive to you?

Previous Post : Nooresh Merani Guest post on How does a Day trader looks like?

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This is a guest Article from a fellow blogger friend and a very good Technical Analyst, Nooresh Merani. This is an interesting article where he presents how a profile of a Day trader looks like.

A part of this article was published in May 14th Issue of Money Today Magazine. I hope it would be a good read for everyone , Even If you are not related to Trading , you will come to know what is Day trading and how it can be a full time profession and very rewarding one . Read the article Below .

THE JOB = Day Trading

Job description: 6 hours a day / 5 days a week which requires hardly any physical activity apart from grunting or swearing in anger or thumping hands, tables and chairs in happiness.

Desired Profile: The desired candidate should be good at accounts and quick at using the computer keyboard or mobile keypads. No formal education or age bar.

Company Profile: It’s one of the oldest organizations (BSE is formed in 1875!) which is open to all candidates provided they have capital to trade with.

Remuneration: The salary has no upper limit but the candidate has to forego a small amount as brokerage/ taxes on the transactions.

The above job description seems a dream job!!

The profile of a day trader is not as rosy as it seems as they don’t have a fixed salary, instead they have to risk a security deposit (trading capital) paid up with the company (exchanges/brokers) which may be blown off in few hours, days or weeks or years.90% of Traders pay salaries for the rest 10%.

Trading is one serious business and a highly disciplined profession but, a large section of traders who don’t have this attitude get thrown out of the system very quickly. A trader learns from the mistakes, accomplishments through his trading career and by honing his technical and intuitive skills.

Initial grind:

Every traders goes through the initial grind (sometimes recurring) of losses, depression, self -realization and more.
A must Quote for every traders’ desk, “People who learn from their own mistakes are Wise, People who learn from others mistake are Wise and Lucky and, those who do not learn at all are Traders (Suckers)”

So, to be successful in trading, the most dynamic profession, where even a richest man can’t afford an hour’s lunch break (the Gujarati Thali would cost somewhere in Lakhs!!), one needs to learn, evolve, adapt and be disciplined. Always learn from the past, apply it to the present so that you can gain in future!!!
A Traders Day!

Pre-Morning work:

First thing a trader checks is how Dow Jones, European indices performed overnight and the current situation of Asian markets. SGX Nifty in Singapore opens up much before India so a trader gets hint of Nifty opening.

The trader makes modifications to the stock lists and observations made for the day. Technical, Pivot and data traders are ready with a list whereas system traders rev up their mechanical engines which generally don’t deliver much.

Trading Hours:

Although every trader has to see the ticker on his computer monitor for prices, but, there is a section of traders who only rely on ticker reading, which is a study of price & volume fluctuations. For best results, a combination of intuition, ticker reading and knowledge of technical analysis is a must.

Indian markets are one of the most volatile ones and it’s a common saying out here – Nazar hati durghatna ghati (Moment you get your eyes off you will meet with an accident). So a trader has to be attentive and nimble footed to make split-second decisions and follow the personal trading style/rules.

Post Trading Hours:

This is the best time for the trader to catch up on a snack or freshen after finishing of the calculations and noting down the open trades or the profits made in the day.

Analysis and Self-Evaluations:

The amateur traders don’t realize that this part of a trader’s life is equally important. Technical traders go through their charts; mechanical traders test their system to come out with a list of possible stock trading ideas for the next trading session and evaluate the current positions.

Trading as a profession has the most ups and downs with terribly bad trading sessions and equally high performance sessions. Every trader needs to keep evaluating, modifying and optimizing their trading styles to stay in the loop or the market knows a way to kick you out.

Latest Experience with the Screen!

Although I and many of us traders do follow the above plan but human nature is frail and one does make mistakes. One thing I have realized with experience is if you make a cheap mistake (small loss) early you would make a killing next time around by not repeating it.

The last mistake I made off late was to pre-empt and anticipate a big down move in 2nd week of March which didn’t come but luckily got saved because of stop losses and the screen. The next time around I did the simpler thing of re-acting to the ticker sense.

My one such encounter with markets was on 15 April 2009 when Indian indices outperformed global indices.

Many traders were yet again caught on the wrong side of the trade by watching the performance of Dow Jones overnight.

The index opened lower and drifted lower. But, ticker did not show signs of weakness and out of index counters continued to gain strength. What lot many traders missed out was, that Hang Seng (Hong Kong) was up 600 points on 14th March, the day Indian markets were closed due to a holiday.

Any technical analyst would confirm Hang Seng bears the closest co-relation statistically with India. So, this simple observation kept my bias bullish though the index was negative to start with.

The ticker was purely biased towards the mid cap segment in the last few sessions so my focus was on them.

We kept on holding to the previous open positions (namely Crompton, ks oils, guj nre, gtl infra, ghcl).

Also, seeing the momentum, added on to my technical picks Dishman Pharma, Everonn & Crompton for the day at higher levels then opening which gave awesome moves of 10% + in the day!!

Sensing that the up move was backed by nervous morning sellers squaring up, we booked out of previous positions to reduce the risk exposure and raising stop-losses to cost to conserve gains. A combination of aggressive buying along with disciplined money management did the trick as index closed 200 points lower the next day.

The learning from above experience was “Respect the Screen & Markets are Supreme”. A Trader looks for intuitive hints from the screen and doesn’t ask why it’s performing so, but, just follows it on the path to making money.

Above all would like to end this with few words of wisdom in Gujarati – Market Ni kamai market ma samai – (Money made in the market, stays in the market). A wise trader makes money and takes it home regularly!

Happy Trading!

Nooresh Merani , Analyse India

Blog: https://nooreshtech.blogpost.com

Website: www.nooreshtech.co.in
Email: [email protected]