The Pension Fund Regulatory and Development Authority (PFRDA) has allowed pension fund managers (PFMs) of the National Pension System (NPS) to raise investment management fees, ie, higher fees than before. The new tariff structure for each category has come into effect from 1 April. The fee paid in this framework can be recovered by the managers who have been issued new certificates of recognition on 30 March.
A person associated with the pension fund industry said that the hike in fees is good for fund managers as it will make it profitable for them to do business. A source said that earlier the fee was getting only 0.01 per cent ie 1 basis point, which was very low and due to which the entrepreneurs were losing money. Fee hikes are generally considered unfavourable for customers, but financial planners do not believe that this will affect their business or that people will stay away from NPS. Arnav Pandya, the founder of MoneyEduschool, said, ‘The new fee is also very low. Investors will hardly feel the difference in fees. As it is, the fee structure is based on the footsteps and slabs. After this increase, the average fee is increasing from 1 basis point to maybe 3-4 basis points. ‘
Dipesh Raghav, founder of PersonalFinancePlan, says, “If the amount lying in the pension fund is being managed well, then the new fee is right.”
Mutual fund companies that run equity exchange-traded funds (ETFs) have an expense ratio of 0.05 to 1.08 per cent. There are also a few debt ETFs that charge 0.05 per cent or less. Index funds (direct) charge 0.05–0.91 per cent and regular index funds charge from 0.3 to 1.19 per cent. Actively managed equity and debt funds charge even more.
Special tax benefit
The good thing with NPS is that along with low expenses, it also offers many benefits. Since withdrawal of funds before the age of 60 years is difficult in this scheme, a significant amount of money is usually deposited in the investor till he retires. In this, managers themselves worry about asset allocation. Pandya says, “Those who have an understanding of the market can choose to do asset allocation themselves. But for those who do not understand the market, it is good to choose the option of automatic allocation because the allocation varies according to age. In this, the portfolio is rebalanced on the anniversary of the investor. Says Raghav, “Most of the investors who take up the responsibility of handling portfolios themselves are unable to do so. It is also a matter to keep in mind that there is no tax liability due to rebalancing the portfolio in the NPS. When the age of investment reaches 60 years, 40% of the total amount in NPS is put in annuity and the investors get a pension for life. Along with this, investors also get a special tax benefit of Rs 50,000 under Section 80 CCD (1B) of the Income Tax Act.
But the money will be stuck for a long time
While investing in NPS, it should be kept in mind that the amount has to be stuck till the age of 60 years. This lock-in period is really long and may not be liked by those who do not have much investment in high liquidity schemes i.e. schemes that allow withdrawal of funds at any time. It may also be that some investors did not like the mandatory condition of putting 40 per cent of the amount in the annuity at the age of 60 years. Those who retire before 60 years of age and want to withdraw their money, will have to leave 80% of the total deposit amount in the annuity.
So what do you do?
The change in the fee structure should not have any effect on your decision to invest or not in NPS. If you do not want a tax benefit of Rs 50,000 and you take full discipline in financial matters or investment and you want the convenience of withdrawing your investment at any time, then you can also invest in such index fund instead of NPS for retirement. , In which the expense ratio is only 5 to 10 basis points.
Investment management fees are charged from NPS investors, they also have to pay some other types of fees. One of these is the annual maintenance fee, which is charged by the record-keeping central agency. The National Securities Depository charges Rs 95 and KfinTech charges you Rs 57.63. Not only this, whenever you invest, you have to pay the contribution processing fee. This fee is 0.25 per cent of the amount of contribution (at least Rs 20 and maximum Rs 25,000). If you want to avoid this fee then you should open an ENPS account.