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World’s cheapest retirement scheme is here

business Updated: Feb 22, 2009 20:45 IST
Sandeep Singh
Sandeep Singh
Hindustan Times
Pension Fund Regulatory and Development Authority

A 0.0009 per cent fee for managing your wealth makes pension funds, that will be launched on April 1, the world’s lowest cost money managers. Technically called the new pension system (NPS), pension funds will come to life under Pension Fund Regulatory and Development Authority (PFRDA) and offer Indian citizens, particularly contract workers, an inexpensive option for planning their retirement.

To put this figure in perspective, pension fund managers (PFMs) will charge Rs 9 as fund management fee under NPS for managing Rs 10 lakh. In contrast, the same investment in an equity scheme of a mutual fund will charge Rs 22,500 upfront, while a debt scheme will charge Rs 5,000-6,000.

In addition, a mutual fund will charge up to 1.75 per cent on your total corpus every year, compared to Rs 350 for any amount that is invested in the NPS. So, a Rs 10 lakh investment corpus on which you add Rs 1 lakh will cost you the sum of Rs 2,250 and Rs 17,500. The same investment in NPS comes for Rs 359.

The low charge structure makes the product more attractive when compared to its nearest low-cost option, mutual funds — investment plans from insurance companies (unit linked insurance plans or ULIPs) don’t even come close.

The net impact: Rs 1 lakh per annum invested in NPS will grow to Rs 1.8 crore after 30 years, assuming a 10 per cent per annum return. If put in a mutual fund, the money will grow to Rs 0.8 crore.

And even though NPS returns will be taxed when withdrawn under the exempt exempt tax (EET) regime (investment taxable when withdrawn) — an anomaly that the regulator has been fighting with ministry of finance to equalise with the provident fund scheme that enjoys exempt exempt exempt (EEE) regime (investment not taxable even at the time of withdrawal) — it will still generate a higher return than a mutual fund.

As fund management fee is very low, experts argue that it is unsustainable for the fund houses. “Operating at such cost is not feasible and no one will be able to recover their cost,” said the head of a financial institution that could not make it into the list of successful bidders.

This is a long-term game, PFRDA Chairman D Swarup told Hindustan Times. “I had warned all the bidders that you enter this business only if you are a serious player. Because even if there is lot of potential, you are not going to make money for the first several years.”

While it appears to be an ideal investment option for long-term retirement savings for households, financial planners have their reservations. “It is a good initiative but I have my concerns on the quality of fund managers who will be managing the scheme,” said a financial planner on conditions of anonymity. “At such a low charge it is practically impossible for the fund house get good fund managers to manage the fund.”