Should changes in the New Pension Scheme worry you?

What is NPS? Most people can be pardoned if that is their response to a question about their views on the recent changes in the New Pension Scheme, which is more popularly known as NPS. This is despite the fact that NPS has been available for the general public since the last four years.

Let's take a quick look at what is NPS. Any Individual can start a NPS account by contributing money regularly and if the individual is employed, his employer can also contribute money up to a certain limit. The account holder can choose the proportion of money that will be invested between equities, securities and other debts with a maximum allocation of 50 per cent allowed for equities.

There is a default proportion between equity, debt and government securities depending on the account holder's age if he does not or cannot make a choice.

The account holder can choose from among several fund managers and keep changing his choice of fund manager periodically. As far as equity investment is concerned the fund manager was allowed to invest only in nifty or sensex index funds or was allowed to re-create either of these indexes.

What has changed?

In a recent amendment, PFRDA, which regulates NPS, allowed fund managers to invest specifically in equity shares that meet a certain criteria and not necessarily recreate the Nifty or the Sensex. They have also been prohibited from investing in index mutual funds though they can choose to continue to re-create the index rather than invest actively. An investment in an index fund is essentially a passive style where the fund manager just mechanically recreates an index whereas when he invests in specific equity shares he exercises judgment, which may go either ways. So the return on an index fund is likely to mimic the return on the underlying index whereas the returns on an actively managed equity fund can be widely different depending on the skills and luck of the fund manager.

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