The final New Pension Scheme (NPS) investment guidelines for private citizens finalised by the Pension Fund Regulatory & Development Authority (PFRDA) has capped the maximum exposure to equities in any scheme at 50% of the total corpus.
The cap was criticised by HDFC chairman Deepak Parekh, who chaired the committee that drafted the original investment guidelines. The revised norms roll back the suggestions made by the Parekh committee to allow 100% equity investment for schemes where investors were willing to take a risk?the so-called ?E? asset class.
?It is unfair to investors who are young and knowingly want to invest 100% of their savings in equities. It will just make them choose mutual funds. It may be reasonable to cap the exposure to equities at 50% for the default option,? Parekh said.
The NPS for Indian citizens that are not civil servants will be rolled out in two days, on May 1. The investment rules notified by the regulator on Wednesday will be mandatory for all six fund managers.
?These norms were finalised based on comments from the public as well as on the opinion of other stakeholders, including the NPS trust and the finance ministry,? PFRDA chairman Dhirendra Swarup told FE.
But the new investment plan goes back on PFRDA?s own modifications posted on the Net as a draft report. According to experts, limiting the exposure to equities at 50% has diluted the concept of having an ?E? asset class. Said monetary economist Ajay Shah, ?The Parekh committee report was on the right track.?
The guidelines say while citizens will have the flexibility to create a retirement savings portfolio by deciding their own asset allocation from three sets of approved securities?equities (E), government (G) and corporate bonds (C)?the maximum exposure to equities will be 50%. Citizens can, however, opt for 100% exposure to government and corporate bonds.
Similarly, under the default option, which will come into play if a subscriber does not specify a scheme, the maximum exposure to equities has been limited to 50% until the age of 35. While the Parekh panel had mooted a 65% exposure to equities, PFRDA had mooted a 60% cap.
The final norms for the default option have permitted a maximum allocation of 20% in government bonds and 30% in corporate bonds until the age of 35. By the time a subscriber is 55, the allocation to equities and corporate bonds would be gradually reduced to 10% of the portfolio and 80% to government bonds.
The interim regulator has already issued a registration form for opening an NPS account that requires a subscriber to specify an investment option. The investment norms were finalised after a long-winded process spearheaded by a committee led Parekh, whose recommendations were later modified by PFRDA which then also sought public comments. But many of the Parekh panel?s suggestions have been shelved.
The norms have allowed equity investments under ?index funds that replicate the portfolio of a particular index fund such as the BSE Sensitive index or the NSE Nifty 50 index?. The Parekh panel had recommended equity investments be routed only through the Nifty 50 index fund as it is broad-based. Incidentally, the way the final guidelines have defined acceptable equity indices seems to imply that fund managers can also invest in equity indices like the CNX 100 and S&P CNX 500.
For the ?C? asset class, investments can be made in liquid funds of asset management companies regulated by Sebi, bonds floated by public sector enterprises and credit rated public FIs, as well as municipal and infrastructure bonds. Investments can also be made in the ?C? class in fixed deposits of scheduled commercial banks with a net worth of Rs 500 crore, a track record of profitability, a capital adequacy of at least 9% in the last three years and net NPA of less than 5% of net advances in the last five years.
Debt securities with a maturity of not less than a three-year tenure issued by corporate bodies, including commercial banks and PFIs are also included under corporate investments. The final norms have permitted investments in government of India and state government bonds under the ?G? asset class.