Since there are many and complicated choices, retail investors stand to benefit
With the Pension Fund Regulatory and Development Authority (PFRDA) allowing retirement advisors to charge 0.02 per cent (two basis points) from customers under the National Pension System (NPS), the first step towards formalising “charge-for-advice” has been taken.
This will help both investors and retirement advisors (RAs): More people will be willing to push NPS which is good news because of its exposure to equity that will give better returns over longer time periods. Also, since the amount has been pegged at Rs 100 (not less than) - Rs 1,000 (not more than) annually, returns of investors will not be hurt so much.
While there is a debate going on whether the amount is sufficient to attract enough RAs to the business, investors who are able to get an advisor should start using the option because of many choices (different debt-equity proportions) in NPS.
“Most Indian investors put their money in simple, fixed-income products which don’t require much choosing or monitoring. But NPS is not so simple. Investors need hand-holding to make the right choices,” says Arnav Pandya, a Mumbai-based financial advisor.
The key points where investors can benefit from an RA’s advice include the suitability of NPS for them, given that it is a long-duration investment with limited liquidity.
“The advisor can also assess and advice on how much an investor needs to invest in NPS to meet his retirement goal,” says Anil Rego, chief executive officer (CEO), Right Horizons.
Next, investors need to choose between the active and the auto-choice options. If they choose the former, they need to decide on their equity-debt mix based on their risk profile.
Next, they need to decide on the type of debt funds they would like to invest in - corporate bond fund (C) and/or government bond fund (G) - and also the split between them.
Within the auto-choice option, the number of funds is set to go up, with PFRDA introducing new funds offering 75 per cent equity allocation and 25 per cent equity allocation (besides the 50 per cent allocation fund that has been in existence).
So, here too the right choice has to be exercised. Thereafter, investors need to choose the right fund manager based on track record.
In the active choice option, the investment will have to be monitored periodically to ensure that it is on track. Monitoring NPS is not simple given that there are multiple fund managers with multiple funds, which means multiple NAVs.
Data on returns is not as widely available as for mutual funds. In the active choice option, the investor needs to change his asset allocation as he ages, and also a few years prior to retirement.
If the fund manager underperforms, investors need to switch to another. “An advisor will also help maintain discipline and make sure that investments get made regularly,” says Rego.
Prior to retirement, the investor needs to inform how much he would like to withdraw as lump sum and how much he would like to annuitise (subject to limits). “If he doesn't make this choice on time, default options can kick in which may offer a lower rate of return,” says Pandya.
Of course, the million-dollar question is whether the investor will be willing to pay. Like Sumit Shukla, CEO, HDFC Pension Management Company, says: “Indian customers are reluctant to pay a separate fee for advice. It remains to be seen whether they will be willing to make a separate cheque to pay RAs.”
But, for ones who are not financial wizards themselves, it is a good time to start paying for advice.
Illustration: Uttam Ghosh/Rediff.com