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Unlike mutual funds, where a fund house allots units at the NAV on the same day or next business day, depending on the cut-off time for payments received, contributions to accounts in New Pension System –NPS units allotted, at least, four days and up to 10 days after, for non-cash transactions!
The National Pension System (NPS) is still riddled with issues. One of Moneylife Foundation’s members, Pradeep Kavi, recently drew our attention to a major flaw: for contributions made to an NPS account, the units are not allotted at the NAV of the same day or the next day but could be allotted at the NAV of up to 10 days ahead! Thus investors would lose the benefit of a lower NAV on the day of investment. In case one is investing in the equity fund (asset class E) of the scheme where a maximum of 50% of the contribution is invested, one may lose the advantage of investing when the market has dipped.
For example, if a person chose to make a contribution on 28 August 2013 when the Sensex was at 17,996, the NAV of one of the pension fund managers—HDFC Pension Fund Scheme was 9.53 (Tier I - Equity). But if it took seven working days for the payment to be processed, the NAV would have been 6.59% higher at 10.15 while the Sensex moved up 7% to 19,270 as on 6 September 2013. Thus, an investor would have effectively got 6% lower number of units from the equity fund when getting 6% for a whole year has been tough for equity investors.
In the offer document of NPS schemes, there is no mention of the applicable NAV for an investment. However, upon digging deeper, in a document from PFRDA‘s ‘Handbook on NPS’, certain timelines are mentioned. For cash contributions, the document mentions that it takes four business days for the payment to reach the pension fund managers, who then invest and declare the NAV at the end of day. For non-cash payments, the number of days increases with the time taken to clear funds. Therefore, considering non-business days in between, for non-cash contributions it could take over from two to 10 days.
This would not happen in the case of mutual fund schemes which are similarly managed. It is clearly specified in mutual fund offer documents that for valid applications accepted at an official point of acceptance up to 3.00pm with a local cheque or demand draft payable at par at the place where it is received, the closing NAV of the day of receipt of application is applicable. After 3.00 pm the NAV of the next business day is applicable.
The fund investment process in NPS is initiated when the trustee bank receives funds from a point of presence (where the investor makes his payment) and transfers funds to the pension fund managers for investment. While the point of presence (POP) for the NPS deposits the funds to the trustee bank on the next business day, it takes three working days for the bank to upload a fund receipt confirmation to the central record keeping agency (CRA). On the fourth day, the bank remits the fund to the pension fund managers.
NPS, which was introduced by the central government on January 2004 for its new entrants and subsequently extended to the private sector on May 2009, has accumulated a corpus of Rs 33,000 crores contributed by 50 lakh subscribers. The government has taken several steps to boost NPS investments. The finance ministry gave additional incentives to all subscribers registered in FY2010-11 who were eligible for getting a contribution of Rs1,000 per year from the government for four years beginning the same year. However, this too, did not draw much interest from new subscribers. One of the main deterrents is that Tier-I of the NPS does not offer a facility to subscribers to withdraw their funds till they reach 60. (Read: New Pension System: Will withdrawal issues be addressed?)
NPS has two accounts. In the tier I account one can start investing from the age of 18 years and your money gets locked in till you are 60 years. In Tier II account one has the flexibility to withdraw any time.
In each account one can choose from three funds: an equity fund, in which you can put up to 50% of your investment, fixed income instruments other than government securities and government securities. One can also choose their own asset allocation through the active choice option. If not, they can go for the auto choice which is an automatic lifecycle-based investing which maintains a 50% allocation towards equity up to the age of 35 and then gradually reduces the equity allocation to 10% by age 55.
The finance ministry argues that NPS could be a good substitute for the employee pension scheme (EPS) of the Employees' Provident Fund Organisation and would be beneficial for subscribers, as they would get decent returns and adequate pension. However, there are still several flaws in the system.