New Pension Scheme

You will lie on an examination table, and 10 electrodes (or leads) are attached to your arms, legs, and chest. The electrodes detect the electrical impulses generated by your heart, and transmit them to the ECG machine. It then analyze your heart’s performance and give a exact picture of how it is doing.

The Indian economy needs a different kind of ECG to resurrect the dead pension market, and thankfully they have one in place.

So what exactly is new pension scheme ?

New pension scheme is a boon for the investors, who wanted to maximize their returns in safe and efficient manner. The scheme is just like an ULIP product, where the investor have to pay make four contributions per year and the minimum contribution has to be Rs 500.

The investor has the option between two asset allocation methods called auto cycle and normal. The normal option gives flexibility to the investor as to how he wants his asset allocation to be and when he wants it. The auto cycle is also called as default option, where a pre-determined asset allocation system is place. The contributions are bifurcated in there three asset class called E.C.G

How does the E.C.G in new pension scheme mean?

The assets allocation in new pension scheme is segregated in three methods called E.C.G

Asset class E: investments are made predominately in equities (upto 50%)

Asset class C: Investments are made in debt securities issued be entities other than state and central government, fixed deposits (FD)of banks etc.

Asset class G: Investments in debt securities issued by central as well as state government.

The following table gives the bifurcation in exact percentages.

The basic feature of ECG method is it takes into the consideration of risk taking appetite of young lad in his early earning years hence the exposure in equity is much more in the early years compare to latter part of your life. The amount in this scheme keeps on compounding, helping the investor to reap the riches in most efficient manner.

So how new pension scheme better than other pension products?

When compared to any other type of investment, the distinguishing feature of the NPS is the shockingly low cost. The annual cost of record-keeping is Rs 380, each transaction will cost Rs 6 and the most amazing of all—the investment management fee is 0.009 per cent per annum. This alone puts the NPS to the pedestrian and it’s the best thing ever happen to the Indian investor Why is low cost so important? Because the magic of compounding over the long time horizon of the NPS means that its beneficial impact will be magnified massively.

The most important advantage the scheme has is that it allows the flexibility to manage your own scheme and make necessary changes.

The power of compounding itself makes the new pension scheme better than any other pension product. The N.P.S is also very competitive compare to other investment products , but the downside is for this product is that it cannot be considered as an investment, since you can only withdraw the money till your vesting age expect for critical illness or building a house.

Even with the downsides the N.P.S is still the most attractive pension product out there. So jump on the bandwagon and get the New pension scheme.

Offers like “Buy one, Get one Free” always fascinates each one of us. However there is some price one has to pay to acquire both the products. In case of a normal consumer product like a soap, the price we pay is the MRP of the first soap and we get the second one free of cost. On similar lines, works the concept of actually doubling your money. So if we want Rs.100 to become Rs.200, there is a price we will have pay for the same. In this case the price we pay is the number of years we will have to invest in to receive the returns keeping a fixed rate of return in mind.

The three important rules highlighted below are the:

1. Rule of 72
2. Rule of 69.3
3. CAGR (Compounded annualized growth rate)

All planners, managers, analysts will assist you calculate the time period in terms of the number of years as well as the rate of interest to be taken into consideration. How ever, if you want to calculate it quickly, so that you know nobody bullies you, use the Rule of 72. The rule of 72 is a rule of thumb that gives approximate results For instance, if you were to invest Rs.100 with compounding interest at a rate of 9% per annum, the rule of 72 gives 72/9 = 8 years required for the investment to be worth Rs.200; an exact calculation gives 8.0432 years.

In case the interest rate is a continuously compounding one and is lower in number , then the Rule of 69.3 is far more efficient in nature. Here you divide your interest rate by 69 and add 0.35 to your answer you get the number of years required.

CAGR is an effective way to figure out the rate of return with only a couple of details.

CAGR= [(Ending Value/Beginning Value)^(1/# of years)] -1

= [(200/100)^(1/8)]-1

= 9% per annum

So, if we invest Rs.100 today for a return of Rs.200/- after 8 years, the CAGR would be 9% per annum.

So next time while you are considering to get double the returns on your investments it would be convenient as well as beneficial for you to use the above rules for quick results.

More than “Kaun Banega Crorepati?‘, its time now to have a look at “Kaise banoge crorepati?“. Clearly every individual is not a Dhirubhai Ambani or a Siddharth Mallya who has either the entrepreneurial vision or an inherited business empire. It doesn’t really take a lot of effort to fulfill this dream of yours. This piece will show you that.

The three “to-do’s” of this not-so-tedious task would be

1. Start early
2. Be disciplined in your investments
3. Know the power of Compounding

The chart below gives you a better picture of how the above three mantra’s can be conveniently implemented.

* Interest Rates are without considering Inflation

*** Assuming retirement age is 55years

If you’re 30 years old currently, on a basic rate of return of 8%p.a. compounded monthly, you would need to save about Rs.10514.96 per month. However if your asset allocation in your portfolio is strong enough, over a span of 25 years, on an average if you could receive a 12% pa return, then would just need to save Rs.5322 per month. So sooner the better! Clearly, the way you allocate your assets will help you understand how much do you really need to save!

Ultimately its WE ourselves individually who need to be disciplined in our savings and its respective asset allocations rather than having a fancy investment plan or a disciplined product. Saving every month or quarterly in equal sums rather than lump sum amounts at anytime during the tenure will incur discipline in savings and avoid ad-hoc savings.

However, if one wants to understand what goes behind this, then here it goes… “The Power of Compounding” With simple interest, you earn interest only on the principal (that is, the amount you initially invested); with compounding, you earn interest on the principal and additionally earn interest on the interest. In other words, it’s a way of making your money work harder for you, and is perhaps the most powerful tool that an average investor can use to plan for many of life’s financial goals, including retirement. Yes! So Benjamin Franklin was right when he said it was the Eighth wonder of the world!

It’s hard to make money but its harder to preserve it. If you earn money but don’t invest it properly, inflation will erode your wealth. To preserve it, your funds should at least earn a rate of return that can beat the inflation rate. Everyone wants to maximize their returns on investment without capital erosion.

There are many different investment avenues such as fixed deposits, fixed income securities, equity, commodities, and mutual funds. Different products have different risks associated with them and different factors affecting their returns. To deal in each product you need very particular sets of skills and knowledge. Equities and commodities as asset classes require constant monitoring. A person who has earned money may not have required the knowledge, time or inclination to manage it. If you are someone who falls into this category, PMS is good option for you.

As clients go, portfolio management services (PMS) is best suitable for those who have a large surplus to invest, as the minimum portfolio size accepted by portfolio managers range between 25 lakhs to 5 crore. It helps if clients are inclined towards equity and commodity markets as these offer great returns and prove portfolio managers with the scope to create value out of the investments. And finally, the investments should have a reasonably long time horizon to reap full benefits of PMS.

So if you don’t have much surplus and you are an equity-averse investor, you can opt for the services of a financial planner or an advisor rather than going for a PMS.

Portfolio managers first analyze your risk appetite and identify individuals goals and objectives. They will then create a basket of stock, bonds and mutual funds to fit into these personal investment goals and objectives. They provide different types of portfolios based on different strategies. A few portfolio managers provide standardized portfolios for sums as small as 5 – 10 lakh, but for customized portfolios they take a minimum investment size of 25-50 lakh. Portfolio managers also accept your existing securities, bonds and mutual fund holdings along with cash which can be then be revamped according to your goal and preferences.

Benefits:

• Asset allocation: The most important and crucial part of financial planning is your asset allocation. You may know the sectors you want to invest your money but you may not have an idea of how much of your surplus you should invest in each sector. PMS ensures that your asset allocations are tailor-made for you based on your investment objectives and risk appetite.
• Professional management: your funds in PMS are managed by a professional who has the required set of skills, knowledge and experience and therefore you don’t need to worry about the ups and downs of the market. You can relax and concentrate on your other commitments as your funds are in safe hands.
• Risk control: Portfolio managers follow some well defined investment philosophies and strategies based on intense research. They also use some highly specialized software that helps them in achieving better returns
• Timing: As they are backed by intense research, portfolio managers can switch your portfolio if they perceive a big risk in a particular asset class and thus preserve the value of your portfolio.
• Convenience & transparency: once you handover your money to portfolio managers you are free of all the administrative hassles such as dealing with brokers and tracking the markets, as all will be taken care of by the portfolio managers. They also provide periodic performance reports. Some portfolio managers also give you online access to your portfolio details such as performance statements, portfolio holding reports, transaction statements, capital gains/loss, providing a high level of transparency.
• Flexibility: If you compare PMS to mutual funds investment, PMS provides greater flexibility than mutual funds as they are not tied to SEBI regulations and can freely use derivatives instruments to increase your returns, or invest in any sector according to requirements. It also provides flexibility to the investor - if an investor wants more weightage given to a particular sector, he/she can ask the portfolio manager to do that. This is not possible in case of mutual fund investments.
• Personal relationship manager: Portfolio managers provide you a designated relationship manager who will help you understand your financial objectives and will advise you the right investment strategy and will provide you periodic updates.

Portfolio managers usually provide two types of PMS - Discretionary and non discretionary. Discretionary portfolio management clients cannot make decisions for the management on his/her portfolio. The portfolio manager will independently take decisions according to the client’s recorded objectives. Non-discretionary portfolio management allows, the client to be actively involved in the decision-making concerning the management of the portfolio.

Lastly but most importantly, how do you pay for the PMS?
Mostly, portfolio managers charge either a fixed fee based on the value of your portfolio - around 2-2.5 %. Or they may ask for performance-linked management fee which will then include a fixed fee of 0.5-1.5% plus a share of your profit - usually 15-20% of that earned over and above the minimum rate of return. Portfolio managers allow their clients to choose between the two.

The author is a Research Analyst working at Apnaloan.com Services (P) Limited.