Should you invest in the Infrastructure Bonds?

One of the fresh tax reliefs that has come as an outcome of the budget 2010 is the deduction allowed for investing upto Rs 20000 in the infrastructure bonds. Many articles and the FM have said that this is a very positive thing. But how can the same thing be positive for every individual.

If not negative it should at least be neutral for many. Else life would be so boring. This article will try to look the pros and cons of investing in Infrastructure bonds for the sake of tax saving. The analysis will be from the perspective of the different "tax groups" post budget 2010.

Tax group 1: Taxable income Rs. 1.6-5 lakhs
Tax group 2: Taxable income Rs. 5-8 Lakhs
Tax group 3: Taxable income above Rs. 8 lakhs.

To understand the pros and cons of any tax saving investment we need to look at 4 major parameters

1. Actual tax saving (let's take the highest saving possible)
2. Returns from the investment (during the lock in period at the least)
3. Opportunity cost (what if the same money had been invested in some other investment?)
4. Effect of Inflation on the returns on investment (what would the worth of your investment be when it comes to redeem/encash it?)


For the sake of parameter two we will have to take an assumption on the lock-in period (as nothing has so far been announced by the Finance Minister). As is generally the case with most tax saving instruments we can assume two scenarios – 3 year lock-in and 5 year lock-in

Let's assume the rate of return on infrastructure bonds = 5.5% per annum

Let's consider overall rate of inflation to be 8%. (Food inflation itself is currently at 18 %!)

For people in the 1.6- 5 lakh taxable income group
As per the new norms the income will be taxed at a rate of 10% for this group.

Parameter 1: Actual tax saving: 10% of Rs 20,000 = Rs 2000 (if you invest Rs 20000 in the instrument you get to reduce your taxable income by 20,000 thus giving a 10% benefit)

Parameter 2: What will be the returns at the end of the lock in period? For a lock in period of 3 years an investment of 20000 would fetch an income of Rs. 3484. When added to the tax saved we get an effective return of Rs 25485 (Rs 20000+3484+2000) on our investment

Parameter 3: If this same amount were to be invested in a market instrument that fetched a return of 15% (which is very reasonable considering that the benchmark SENSEX and many mutual funds have given comparatively higher returns on a long period.) the investment would fetch an effective return of Rs 27, 376 (Rs 20000-2000=Rs 18000 invested @15% per annum for 3 years)

Parameter 4: What would be the minimum amount required to counter inflation at 8%? The amount would be Rs 25, 194.

Thus we see that for a person in the slab of 1.6-5 lakh the benefit out of investing in an infrastructure bond as a tax saving instrument will be only Rs 291 (Rs 25485-25194) whereas the benefit out of paying the tax and investing the balance in any decent instrument would be Rs 2182.

Similarly we can calculate the benefits for each segment as well as for a scenario where the lock in period is 5 years as given in the table below.

Rate of tax 

Investments Made in Infrastructure Bonds Tax Paid In Lieu of Investing in Infrastructure Bonds
Slab Tax Savings Effective Returns Investment Returns from Market after Tax
3 years 5 years 3 years 5 years
30%           6,000                   29,485                     32,139              21,292                           28,159
20%           4,000                   27,485                  30,139              24,334                                32,182
10%           2,000                 25,485                  28,139                27,376                                36,204
Required Returns to Counter Inflation Effect                 25,194                  29,387    

As seen from the table above it makes sense for people in the >Rs 8 lakh taxable income slab to use the infrastructure bonds as a tax saving instrument. For the people in the 5-8 lakh bracket it would be advisable to invest in infrastructure bonds if the period of investment is 3 years but not for five years and for those in the 1.6-5 lakh bracket it would be an absolute no-no to invest in Infrastructure bonds for tax saving purpose.

Source: Yahoo Finance

How to invest in Infrastructure Bonds?

Lots of financial institutions use to launch infrastructure bonds and one got a fairly decent tax benefit on them and a lot of Indian put their money in to save tax primarily into these bonds until a few years ago.

Then there was a gap for several years and again this year the government announced Rs 20000 exemption when you invest in an Infrastructure bond. And we are seeing a floury of such bonds finally being launched. So of course 31  March is the date now is over and above the one lakh that one is allowed under your 80 (c) investments or another Rs 20000 more if you go for an infrastructure bond.

Quite obviously lots of questions in all of our minds that should we be investing in these bonds, what the kind of returns do we get, how safe are they, how liquid are they, is it important to be in it, how much of tax can I save?

In an interview to CNBC-TV18, Harsh Roongta, CEO, and Vikram Limaye, Executive Director, IDFC gave a perspective on such bonds and how to include them in personal portfolio.

Here is a verbatim transcript of their comments.

Q: Why should I invest in an Infrastructure bond?

Limaye: Its quite clear to me that based on the structure of the bond and the tax adjusted yield that this bond offers to retail investors, this should be very attractive investment for investors. Basically if I had to summarise the IDFC infrastructure bond provides a very stable safe investment. This is rated as a AAA bond so it’s a very safe investment from a credit perspective, the tax adjusted yield that an investor gets for investing Rs 20000 in this bond, if you are in the 20% tax bracket depending on which series you pick could range anywhere from 10.5% to 13.5%.

So on the whole we are paying a coupon of 7.5 to 8%. The tax adjusted yield of 10.5% to 13.5% is much better than anything else that exits in the market place in terms of a fixed income instrument that is equivalent to a AAA instrument.

Q: From a portfolio management point of view let me get another asset class in when we talk of debt and which is debt mutual fund where perhaps the risk compared to the bond like this to my mind would be higher and of course you raised the point about Fixed Deposit / NSC being a good diversification point as well.  Here you have a product which over 5 years is giving you the kind of yields that Vikram talked of which are double digit, plus the tax benefit. What do you make of it as a portfolio diversification tool?

Roongta: As I said if you strip away the additional exclusive benefit. We are not talking of the Rs 20000 where they get an exclusive benefit your value goes up but otherwise as I said you have got NSC, you have got PPF. PPF in fact gives you returns that are non taxable although liquidity in a PPF probably is slightly, even with the partial withdrawal facility even then the liquidity is not as good as the bond or a Fixed Deposit.

I would say that a debt mutual fund is good but obviously debt mutual fund doesn’t have any tax breaks. So what might make sense is the FMP’s that you have because FMP are now structured so that you get the benefit of indexation and more than one year so that the tax rate becomes almost minimal and there the returns that you get are pretty good and it is reasonably safe not a guaranteed return, there is not even an indicative return’s that’s not allowed but the returns are good post tax and reasonably safe.

Q: I have not invested in bonds before, but would like to begin now. What kind of tax benefits can I get if I invest in infra bonds. I have Rs 1 lakh rupees to invest.

Limaye: You got to keep in mind which entity you are investing with since we are talking about infrastructure bonds IDFC is a very qualified institution because we are an infrastructure focused institutions so we know what we are doing. The use of proceeds of this bonds have to be invested for infrastructure financing so that is what we do for a living and so we understand what we are doing. As I mentioned earlier we are an AAA entity so this is a very safe investment for some body who has not ventured into bonds earlier. He is not taking high risk when he is investing in an IDFC bond.

The tax benefit is available upfront. So while the benefit is restricted for Rs 20,000 as investment if someone has a Rs 100,000 to invest in these bonds on a weightage average basis although the tax benefit is restricted to Rs 20,000 the weightage average yield on Rs 100,000 investment could also be 50-75 basis point better than fixed deposit yield that an investor is likely to get today. So even if the investor has to invest Rs 100,000 the adjusted yield ion a weighted average would be better than the alternative investment that he would make in a fixed deposit.

Q: Taking ahead from what Vikram just mentioned – two points really that came out – one is if I were to compare this with a fixed deposit according to you makes better sense to be in it because a fixed deposit pretty much have a five year lock in if I want that tax benefit. Secondly the point he made about the safety. IDFC is an institution but at the same time there are if I am not mistaken all these institutions are going to be allowed to raise these infrastructure bonds are going to get the approval of the governments so it is not that it is anybody who can come in walk in and start floating these bonds.

Roongta: Absolutely I think clearly these needs to be notified but more importantly if the tax break is not there or this Rs 20,000 is exclusive to infrastructure bond but the others you have things like NSC that gives you slightly better return because the interest is compounded 6 monthly. They are liquid. You can take a loan against them. There is provision for your ability to surrender them before time etc. So clearly as far as the Rs 20,000 exclusive allowance is concerned it increases the yield quite a lot but for anything else there would be other comparable if not better instruments liquidity is not compromised and which might yield better returns.


Confused over Growth, Dividend pay-out, Dividend Reinvestment or bonus option in Mutual Funds

Rajeev Mehra (name changed) a young IT professional has identified the mutual fund scheme that he wishes to invest in.

However, while filling in his investment application, he is perplexed with the various investment options available viz. growth, dividend pay-out, dividend reinvestment and bonus.

Despite being aware of what these options meant, he could not decide which was most suitable for him.

Irrespective of the scheme option chosen, the gains that you receive (excluding the tax implications) would be identical across all. Therefore, you should keep in mind your investment horizon and tax liabilities, while choosing the scheme that is most suitable for you.

Taher Badshah – Sr. Vice-President & Co-Head of Equities, Motilal Oswal Asset Management Co. Ltd., echoes a similar thought, “The scheme option such as dividend, growth or dividend reinvestment will essentially be a function of the investor’s requirement for periodic returns or cash flows – which in turn will be a function of his or her investment horizon.”

Here are some situational thumb rules you could use:

Equity oriented mutual fund scheme

Case 1: Investment term less than 12 months

If you wish to generate regular income, the best option would be the dividend pay-out option. However, if a regular income is not required, dividend reinvestment is a better option. Moreover, the dividends declared are exempt from Dividend Distribution Tax* (DDT) and are also tax-free in the hands of an investor.

Case 2: Investment term greater than 12 months

The growth option, in this case, will enable the investment to benefit from the effect of compounding.


Debt oriented mutual fund scheme

Case 3: Investment term less than 12 months

If you are a tax payer and fall in the 10 per cent tax slab, you could choose the growth option or the bonus option as your returns will not attract DDT* while the capital gains tax that you pay will be at the rate of 10 per cent.

However, if you fall into a higher tax slab, then, it would make more sense to opt for the dividend pay-out or reinvestment option, which will save you more on the capital gains tax even after factoring in the DDT in most cases.

Case 4: Investment term greater than 12 months

It would be advisable to choose the growth or bonus option in this case because the long term capital gains tax liability is calculated at the rate of 10 per cent, without indexation, or 20 per cent with indexation, whichever is lower and the DDT is not applicable.

Note: DDT rates applicable in case of individuals is 27.68 per cent, in case of money market or liquid funds and 13.84 per cent in case of other debt funds. All tax laws are for the financial year 2010-11.

Source: Economic Times

How many MF schemes you should have in your portfolio!

Designing the right-size portfolio The famous maxim referred to as the “Occam’s Razor” goes like this – “entities must not be multiplied beyond necessity”. Keeping with this maxim, a portfolio that is of a correct size should satisfy two clauses – a necessity clause and a sufficiency clause. These refer to how many funds are necessary to have in a portfolio and how many schemes are sufficient, meaning any more would be of no extra value.

To determine what is the minimum number of schemes you should have in a mutual fund portfolio, let’s look at the objectives of any such portfolio:

An investor is looking for diversification, risk-mitigation, and returns that are, overall, better than the market returns. Broadly, there are two asset classes available for regular investors – equity and debt. If an investor is looking to have a well-diversified portfolio, an equity holding and a debt holding are must-haves. So, that gives us a starting point of two schemes in the portfolio. (Of course, there are balanced-funds which promise to hold both, but by holding them, an investor loses control over the allocation between asset classes).

Equity schemes When you invests in a diversified equity fund, you are doing so trusting the fund house reputation, and the fund manager’s performance over a period of time. Of course, “past performance is no guarantee of future results”. A fund-house could undergo structural changes, and fund manager might move or have a bad year. So, it would be prudent to be invested in more than one equity scheme. That gets us to a minimum of two equity holdings in a portfolio. Also, having two schemes gives one the flexibility of investing in a tax-savings (ELSS) fund and in one regular fund.

Debt schemes In a debt scheme, the need to mitigate risk and be diversified is the same. The fund manager’s performance matters a little less in debt schemes when compared to the interest rate scenario in the country and the world at large. To be well covered in multiple scenarios, you would need to hold a scheme that specializes in short term debt and one that specializes in long-term debt. Again, the number is two.

Tools: Allocate your assets

Four is the number! That gets us the minimum size of a good mutual fund portfolio – four. Now, what would be the maximum size? What would be a sufficient number of schemes beyond which things get too complicated?

This was a tricky question. But how many is too many? To find out, I turned to Shankar Bhatt, our resident financial advisor. Shankar has been advising clients for about a decade now, has advised people of various stripes – age, profession, net-worth, and has seen a variety of colorful financial situations. I spoke to him about my cousin’s 21 scheme portfolio and asked him, “So, how many schemes are too many in a portfolio?”

“Well,” he said, “I have managed portfolios that are worth several crores. At no time did I feel the need to have more than seven schemes in a portfolio for any individual. I usually manage with about five or six.”

This upper limit is all the more essential for do-it-yourself individual investors. That limit, researchers have found, is seven. As a portfolio size grows above this number, an individual’s capacity to track and stay on top of their investments starts diminishing rapidly. This, he said, would hurt the performance of their portfolio significantly over the long run.

Thumb rules Follow these two thumb rules to determine if your portfolio is too big for you:

1. Can you name all the schemes in your portfolio without fetching a folder full of statements and transaction slips? 2. Can you keep up with the financial news in reference to your portfolio? For example, if there were an announcement on the TV about the GDP growth rate or the rate of inflation, would you be able to figure out how much of your portfolio is impacted by this news?

Smart investors should be able to understand news and be able react and modify their portfolio if needed.

Maintaining the right size for your portfolio is as important as putting it together to begin with. Typically, portfolios are not born complicated; they grow that way over a period of time. The key to keeping your portfolio at a small, manageable size is simply to have a plan and sticking to it.

Any future investment (including SIP investments) or redemption decision will need to be in line with this plan.

Shankar, however, sounded a cautionary note: The number of schemes in your portfolio is an important metric, but it’s just one metric. As important, or probably more important, is the asset allocation and balancing the overall investment portfolio, not just your mutual fund portfolio, between debt and equity components.”

Final words Remember that as the number of funds in a portfolio increase, the less manageable it becomes, potentially hurting its returns. And an ideal number of funds in a portfolio, regardless of the amount of money invested in it are between four and seven.


10 rules to select right Mutual Fund

Flummoxed with the variety of choices in picking a mutual fund? Fret not, here are tips to selecting the one that is right for you.

1.    Does the fund match your ‘financial profile’?

Mutual funds offer a whole bouquet of products such as aggressive equity funds, index funds, gilt funds, income funds, liquid funds, gold funds, thematic funds, etc. – the list is quite exhaustive.

But beware! You don’t have to buy all these types of funds.

As you would observe, all funds have a specific objective, a specific risk profile, a specific liquidity profile and a specific time profile. Hence, it is not possible that all funds will match your needs, risk-appetite, investment horizon etc.

Therefore, you must first decide on the types of funds that would suit your needs. Only then should you start selecting the best funds within those categories.

2.    Past performance

The past performance of the fund is one of the most important criteria in fund selection.

It is true that a fund’s good performance in the past does not guarantee that in future too it will do well. However, history also shows that funds with consistently good performance – good here means in the top quartile and not necessarily the top performer – can be expected to be among the top in their category in future too.

Similarly, a fund with poor performance will find it extremely difficult to move to the top quartile and remain there.

Therefore, don’t chase the top performers of the year. Instead, focus on funds that have delivered good returns consistently.

3.    Portfolio characteristics

Characteristics of a portfolio will also play an important role in fund selection.

For example, the percentage of top 5 or 10 holding will determine how diversified or concentrated a particular fund is. If about more than 60-70% of the corpus is invested in just 5 shares or bonds, the portfolio would be comparatively riskier than a fund with just 20-30% corpus in 5 scrips.

Typically, an aggressive equity fund would have higher turnover ratio. Comparatively speaking this is perfectly fine. But an index fund with a higher turnover ratio vis-à-vis its peers could be a cause for concern.

4.    Is the AUM appropriate?

There is, of course, no mathematical rule that would suggest the best size for a given mutual fund. In other words, there is no guarantee that if a fund’s Assets under Management (AUM) is less (or more) than a specific level, only then will it perform well.

Having said that, AUM could be an important factor in the fund’s overall performance!

In all probability, a very small fund will not be able to diversify itself reasonable well. It will also find it difficult to make the best of the investment opportunities available. As such, the performance could be very erratic — one year they would be the best performers and the next the worst. It would be preferable to avoid them.

A fund too large could also be an issue. Since a fund cannot invest more than 10% of its corpus in one company, a very large fund would invariably have too many companies in its portfolio. This could affect its overall performance.

5.    The fund house/fund manager

Investment is both a science and an art. Good research teams i.e. the science part of investing, are necessary in identifying the opportunities available in the market. 

However, if you give the same set of scrips to two different people, they could deliver vastly different returns. This means that apart from knowing what the good stocks are, you need something more. This ‘something more’ is the art of investing.

When to buy/sell/hold; how a fund manager reacts to market volatilities; how s/he responds to the pressure of performance; and such other psychological aspects have a very important role to play.

As such, you have to consider the fund manager’s past performance before investing.

That apart you should also evaluate the particular fund house – how many funds does it offer, how many of these are good performers, how much AUM does it manage, what are the service standards, etc.

6.    Risk parameters

Two funds may deliver the same returns. But the better of the two would be the one that does so:
–    By taking lesser risk (i.e. it has a higher Sharpe Ratio)
–    More consistently (i.e. it has lower Standard Deviation)
–    With less volatility than the market (i.e. it has a lower Beta)

Therefore, after you have short-listed the funds based on the performance, portfolio, fund house etc., check the risk parameters and opt for those that tend to deliver good returns despite taking lesser risks.

7.    Annual Recurring Expenses

The expenses that will eat into your returns in an MF would typically include management fees, custodial fees, marketing & selling expenses, trustee fees, audit fees etc.

But before you get worried, you will be glad to know that the Association of Mutual Funds in India (AMFI) and SEBI have simplified the issue of expenses. They have specified the maximum limit that a fund can charge as overall expenses by whatever name it may be called.

For example, the maximum expense ratio for an equity fund is fixed at 2.50%, for debt funds at 2.25%, for index funds at 1.5%, for Fund of Funds at 0.75%, etc.

It goes without saying that lower the expenses the better it is. But beware! Don’t give too much weightage to the expenses. Other parameters, discussed above, are far more important than expenses that anyway are quite reasonable.

8.    Entry / Exit Loads

Entry load: As per the recent regulation, SEBI has mandated that with effect from August 1, 2009 there will be no entry loads for all mutual fund schemes.

Exit Load: This is the load payable when you sell of your MF units. The exit load is generally payable only if you fail to satisfy certain pre-specified conditions. Therefore, in most cases you may not find a compulsory exit load, but what is termed as ‘Contingent Deferred Sales Charge’ (CDSC) and payable:

•    If you sell a debt fund before 6 months or some such period
•    If you sell an equity fund before 1 year or some such period

A lower load is better. However, since the load is nominal, sometimes even paying higher loads may be alright if the fund’s performance and other factors are very good.

9.    NAV is a meaningless number

The NAV of the fund has no impact on the returns it will deliver in the future.

Let’s assume you plan to invest in an index fund and you have two choices – Fund A is a new fund with an NAV of Rs. 10, which will mimic the Nifty and a Fund B, which is an existing Nifty index fund with an NAV of Rs. 200.

Suppose you invest Rs. 10,000 in Fund A and Rs. 10,000 in Fund B. You will get 1000 units of Fund A and 20 units of Fund B. After 1 year, the Nifty has appreciated by 25%, which means that both funds would have also appreciated by 25%, as they are a replica of the Nifty.

So after 1 year, the NAV of Fund A would become Rs. 12.50 and that of Fund B Rs. 250. But what is the value of your two investments? Fund A would now be Rs. 12,500 (1000 units * Rs. 12.50/unit) and Fund B also would be Rs. 12,500 (20 units * Rs. 250/unit).

The bottom line is that don’t bother about the NAV of a mutual fund, as you might do for the price of a share.


10.      Dividend or Growth? 

Like NAV, it is immaterial whether you choose the dividend option or growth option as far as the performance of the fund is concerned. In fact, even though you have different options, the underlying fund is the same. As such, the basic returns from all the three options i.e. growth or dividend payout or dividend reinvestment will be the same.

However, the final returns in your hand could be different due to taxation.

Tax rates are different, depending on whether you get this return in the form of dividend or capital gains. Therefore, the post-tax returns in your hand may vary depending on your tax profile. As such, you have to choose the option from the point of view of where your tax will be minimal and not from the point of view of the returns.

To keep things simple, just remember to opt for growth option if your investment horizon is more than 1 year and dividend option for less than 1 year (assuming you are in the highest tax-bracket).

How to sell your NSC, Mutual Funds, Shares, Fixed Depsoits

There are several occasions when you need cash urgently and may want to liquidate your existing investments. It may be for an overseas holiday or to buy a house or for a medical emergency. Here is a brief on how to go about liquidating your investment and the possible time frames needed to do the same.


Your mutual fund sends you a hard copy of the statement. The bottom part of it is a perforated transaction slip. You need to fill in the transaction slip and tick the relevant particulars in redemption form and submit it to any of the registrar’s office or office of the Asset Management Company before 3 pm. They will acknowledge the same with a time stamp. If things are in order, and you have filed all needed particulars, your cheque shall be ready within T+2 working days. If you have mandated a direct credit in your account, the funds shall be credited into your account. Else, a cheque will be couriered to your residence. it may take your bank to clear the cheque and realise the amount. All in all, it could take 7-10 days for you to realise your funds, if you do opt to get a redemption cheque. If it is direct credit, it could work out much faster.


When you wish to sell a share, you need to call a broker with whom you have a securities trading account. You could place a ‘sell’ order with him. Once the order is executed, you need to deliver the shares to your brokers account by filling in an demat transaction slip on the next day. On the pay in day you are eligible to get a cheque for the sale of your shares from your broker. That means if you sell your shares on Monday, typically you will get your cheque on Wednesday. If you deposit the cheque in your bank account on Thursday, you will get cash by Friday night or Saturday morning. In case you have an online bank account, the funds shall be credited in your account by Wednesday night itself. So all in all it could be 3-6 days to realise credits into your account.


In case of a (NSC), you must hand over the certificate, duly signed by the unit holders to the respective post office, a week before the maturity date (six years from the date of investment). In some cases, post offices might have to process such certificates through their head office, and hence would take 3-5 days for the same. So it is necessary to tender the certificate a week in advance. Once the application is processed the cheque for the amount due, will be given to you on maturity.


You could send the receipt duly signed to the company about a week before the maturity date. The company should be able to credit the amount in your bank account directly on the due date or courier a cheque to you so as to reach you before the maturity date.


It is easy to liquidate an FD if you have a savings bank account with the same bank. Just walk into the bank branch with your fixed deposit receipt (FDR) on the maturity date and the proceeds will be immediately transferred to your savings account.

10 smart ways to avoid investments fraud

  • Deal with certified financial planner, AMFI certified distributor or IRDA certified insurance agent. Do not deal with sub-brokers as they're not fully trained and does not have complete knowledge.
  • Always check the identity card of the person to whom you're dealing with. Check the company name & date of validity of the card. Generally, IRDA license is valid for 3 years and AMFI license is valid for 5 years from the date of issuance / renewal.
  • Do not blindly trust any one even if you know him / her from several years. Always ask for official brochure of the product you're dealing with & see everything written there.
  • Always use your own pen while filling application form and/or cheques. The era of frauds using invisible ink of agents has just begun.
  • Always write application no., your name, mobile phone no. at the back of the cheque. If you're giving renewal premium cheque, write your policy no. also.
  • Ask for official illustration of the insurance product or fact sheet of mutual fund before investing.
  • Ask your advisor to show the comparison with other competitive products. You may like some feature of other product which your advisor does not like.
  • Note down the your agent / distributor full contact details before submitting application forms like full name, ARN No. or IRDA license no., branch address & phone no., residential address & phone no. – mobile phone & landline, email address etc.
  • Always put the date below your signature, where ever you sign.
  • When you get your policy bond / statement of account, check all the details like your name, contact details, nominee name & other things. Go through all the documents. Pay attention to the charges portion carefully. The company gives photocopy of your filled application form along with your signed official illustration with policy bond. If you're not satisfying with the terms & conditions, you can return the original policy bond with 15-days free look-up period & get your money back.
  • Check for renewal date & payment frequency carefully in your policy bond. It has come to notice that several agents had taken the cheque from customers for yearly mode or half-yearly mode & has submitted the documents on monthly mode.

Frequently Asked Questions on New Pension Scheme (NPS) Questions

Whether a retiring Government servant is entitled for leave encashment after retirement under the NPS?
The benefit of encashment of leave salary is not a part of the retirement benefits admissible under Central Civil Services (Pension) Rules, 1972. It is payable in terms of CCS (Leave) Rules which will continue to be applicable to the government servants who join the government service on after 1-1-2004. Therefore, the benefit of encashment of leave salary payable to the governments/to their families on account of retirement/death will be admissible.

Why is it mandatory to use 40% of pension wealth to purchase the annuity at the time of the exit (i.e. after the age of 60 years) from NPS?
This provision has been made in the New Pension Scheme with an intention that the retired government servants should get regular monthly income during their retired life.

Whether any minimum age or minimum service is required to quit from Tier-I?
Exit from Tier-I can only take place when an individual leaves Government service.

Whether Dearness Pay is counted as basic pay for recovery of 10% for Tier-I?
As per the New Pension Scheme, the total Dearness Allowance is to be taken into account for working out the contributions to Tier-I. Subsequently, a part of the “Dearness Allowance” has been treated as Dearness Pay. Therefore, this should also be reckoned for the purpose of contributions.

Whether contribution towards Tier-I from arrears of DA is to be deducted?
Yes. Since the contribution is to be worked out at 10% of (Pay+ DP+DA), it needs to be revised whenever there is any change in these elements

Who will calculate the interest PAO or CPAO?
The PAO should calculate the interest.

What happens if an employee gets transferred during the month? Which office will make deduction of Contribution?
As in the case of other recoveries, the recovery of contributions towards New Pension Scheme for the full month (both individual and government) will be made by the office who will draw salary for the maximum period.

Whether NPA payable to medical officers will count towards ‘Pay’ for the purpose of working out contributions to NPS?
Yes. Ministry of Health & Family Welfare has clarified vide their O.M. no. A45012/11/97-CHS.V dated 7-4-98 that the Non-Practising Allowance shall count as ‘pay’ for all service benefits. Therefore, this will be taken into account for working out the contribution towards the New Pension Scheme.

Whether a government servant who was already in service prior to 1.1.2004, if appointed in a different post under the Government of India, will be governed by the CCS (Pension) Rules or NPS?
In cases where Government servants apply for posts in the same or other departments and on selection they are asked to render technical resignation, the past services are counted towards pension under CCS (Pension) Rules, 1972. Since the Government servant had originally joined government service prior to 1-1-2004, he should be covered under the CCS (Pension) Rules, 1972.

Tips to select policies that can suit you under NPS

The new pension scheme is available for both government employees as well as other citizens of the country. There are seven pension fund houses authorised by the pension regulatory body, PFRDA, to manage the fund.

All these seven fund houses provide one scheme for state government employees and one for central government staff.

It is mandatory for these employees to invest in one of the schemes offered by these pension fund houses. Rest of the citizens can select any of the schemes offered by six pension fund houses.

Currently, LIC has not got the mandate to offer a pension fund to this category. Each of the six pension fund houses offers six schemes, three under each of tier I and tier II accounts.

Tier I is a mandatory nonwithdrawal pension account while tier II is a voluntary savings account that allows withdrawals as well.

These include Scheme E that invests in equity, Scheme G that invests in government bonds and Scheme C that invests in corporate bonds. Investors have an option to choose from either auto or active investment strategy. Once the strategy is selected, he can choose the pension fund house.

In case of the auto strategy, fund is allocated under the schemes in a particular proportion. This proportion changes with the age of the person. So, at an early stage of life, more investment will be in equity and as the age increases, the proportion in Scheme C and Scheme G increases.

Under the active approach, one can decide on the proportion in which the sum can be invested in E, G, and C schemes. While one can choose to invest entire pension wealth in C or G asset classes, only a maximum of 50% can be invested in E.

A combination of all the three can be opted for medium risk and return approach. This is true for both the tier I and tier II accounts while the government employees do not have much choice.

However, a state and central government employee gets to make a choice on the investment strategy and schemes for their tier II account. NPS has approximately Rs30 crore of asset under management (AUM) in all. Tier I comprises almost 85-90% of this while the rest is in tier II account.

SBI Pension Fund House

SBI Pension Fund house comprises almost 65% of the total AUM under NPS. According to the PFRDA guidelines, fund houses need to invest proceeds under Scheme E in an index fund. An index fund replicates the movements of a stock market index such as Nifty, the Sensex, BSE 500 and others.

SBI replicates Nifty 50 under Scheme E for both Tier I and Tier II. The return from this scheme has not been very encouraging compared to its other peers. Since inception, it has got a 21.1% absolute return.

While Nifty has given a return of 14.5% in the past six months, SBI Scheme E has only managed to earn 12.5%. This implies that an investment of Rs100 six months ago in Scheme E would grow to Rs112.5 as of today. The same if invested in the index directly would have been Rs114.5. SBI pension fund has given best returns in the industry for Scheme G and Scheme C.

Since its inception, it has fetched 19.2% and 15.8% absolute returns in tier I C and tier I G scheme, respectively, and 10.5% and 11.3% returns in tier II C and tier II G. However, if we see data for the past six months, then UTI pension fund has performed better in Scheme G.

UTI Pension Fund

UTI Pension fund has almost 10% of the total AUM in its tier I account while the corpus in its tier II account is merely a few lakhs of rupees. UTI also replicated Nifty 50 for both tier I and tier II Scheme E. The returns of UTI equity scheme are the best among its peers. It has yielded absolute returns of 42.3%. This means an investment of Rs100 in this scheme in May 2009 would have jumped to Rs142.2 today.

It has also outperformed Nifty in the past six months. Scheme C of UTI has underperformed considerably. A major reason for this could be low asset under management in this scheme. Scheme G also has not performed well since its beginning. The absolute returns have been only 10.2% and 8.9% in tier I C and tier I G scheme, respectively, which are half that of returns given by SBI's respective schemes. In the past six months, however, UTI's scheme G has outpaced SBI's G scheme.

Our View: NPS is still at an early stage and hence, AUM is extremely low. This makes things difficult for fund managers. Low AUM is a major reason for the subdued performance of all the schemes. Things are expected to change for the better as AUM grows.

However, those who have already invested or are interested to invest in NPS can opt for Scheme G and Scheme C of SBI Pension fund for conservative returns; also, a little amount can be parked in equity scheme E. Those having high risk return appetite may invest 50% in UTI scheme E and the rest in UTI Scheme G and Scheme C.

Source: Economic Times

Gold ETFs: An excellent alternative to physical gold

Gold has been a traditional asset-creation vehicle in India. It is popular as a hedge against inflationary pressures and is considered a safe haven for investors. Gold has historically shown a low correlation with stocks, which makes it a valuable component of any portfolio to smooth out any negative performance in equities.

While the global economic meltdown of 2008-09 resulted in the plunging of stock prices, gold continued to hold strong and delivered appreciable returns even in those distressing times.

Buying gold in India was earlier limited to physical holdings in the form of jewellery, bars and coins. But, with the introduction of Gold Exchange Traded Funds (GETFs) in 2007, investors have been presented with a smart route to invest in gold.

GETFs invest in gold bullions, are passively managed and endeavour to track the domestic spot prices of gold. These open-ended funds are listed on both the NSE and the BSE and can be traded (bought and sold) in units much like stocks. You need to have a trading account and a demat account to be able to invest in these funds.

The future

Shares, Rajan Mehta, Executive Director, Benchmark Asset Management Company Private Limited, “Emergence of GETFs have made life simpler for the investors as there is transparent pricing, efficient and convenient resale and hassle free storage”.

We can safely say that although paper gold in India is at a nascent stage, its future looks upbeat! As Rajan Krishnan, Chief Executive Officer, Baroda Pioneer Mutual Fund, says, “Gold ETFs over the next few years has the potential to become one of the biggest asset generators for the mutual fund industry.”

Source: Economic Times