Wednesday, May 26, 2010

Performance of NPS - 1st Year

The New Pension Scheme (NPS) for private citizens has generated an average return of 12% in the first year of its operations, outperforming
most other long-term saving schemes such as the Employees’ Provident Fund and term deposits.

The year old scheme has a corpus of just Rs 10 crore with 6,000 subscribers as compared with the Employees Provident Fund (EPF) which has over 4.5 crore subscribers with a corpus of over Rs 2,62,000 crore.

Though, the Central government-sponsored New Pension Scheme (NPS) is set to receive a major boost with the SBI moving a significant part of its employees’ pension corpus to the scheme. The NPS will also get significant contributions in coming months by way of employer and employee contribution towards the pension of public sector bank employees who join after April 1, 2010.

Part of the reason why NPS has been able to give a high return is because it can invest up to 50% of its corpus in equities. And its fund management fees is as low as 0.0009% a year. In contrast, the employees’ provident fund of the EPF is weighed down by its very conservative investments and higher costs. It is already clear that EPF will not be able to pay out more than 8.5% interest rate this year as it would face a deficit of around Rs 430 crore even if it increases the interest rate by 25 basis points.

The equity investments of NPS scheme have generated 26% return. The returns on government securities and corporate bonds, however, have averaged just about 5% and 11%, respectively in the period, largely because of a lack of funds.

We continue to maintain that this is a very good investment alternative. Safe and good returns. Go to a bank and ask for this and they would immediately try to sell other products because this doesn't make them money as the costs are very low. If someone is young and looking to build a retirement fund, this would be one of the ideal avenues.

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