With an aim to provide inform investors about the risk level of their investment choice, it has now become mandatory for fund managers to assign ratings to schemes under the National Pension Scheme (NPS). There are required to assign six levels of risk — Low Risk, Low to Moderate Risk, Moderate Risk, Moderately High Risk, High Risk, and Very High Risk.
“Schemes of the NPS are becoming an important asset for investment for the long-term saving of the individuals and help in creating a desired corpus for pension, if invested in an informed manner. The investment under various asset classes of the schemes of pension funds would involve a different level of risks for subscribers and, therefore, it is desired that the adequate disclosure of the risks involved in various schemes of NPS are made available for awareness of the subscribers,” the PFRDA has said in a circular, which has become effective Friday (July 15).
The risk profiling has to be disclosed on the website of respective pension funds under the ‘portfolio disclosure’ section within 15 days from the close of each quarter-ending month. The pension funds will disclose the risk level of schemes on their website as on March 31 of every year, along with the number of times the risk level has changed over the year, according to the circular.
“Risk profiling shall be evaluated on a quarterly basis and any change in risk profile shall have to be updated on the website of pension funds and to be communicated by respective pension fund to NPS Trust for updating it on website of NPS Trust,” the Pension Fund Regulatory Authority of India (PFRDA) said in the circular.
What Is NPS?
The NPS, or the National Pension System, is a government-sponsored retirement saving option where individuals can contribute a monthly amount to withdraw regular income after retirement. It was launched in January 2004 for government employees. Later, in 2009, it was opened to all sections. The NPS is a pension-cum-investment scheme launched by the government to provide old-age security to citizens of India. It brings an attractive long-term saving avenue to effectively plan your retirement through safe and regulated market-based returns.
Types of NPS Accounts
Under the NPS, there are two types of accounts — Tier 1 and Tier 2. Tier 1 account is mainly meant for retirement savings where one has to make a minimum contribution of Rs 500 while opening the account. It also entails tax benefits under Section 80CCD (1B) of the Income Tax Act, 1961.
NPS Tier 2 is an open-access account. It requires a minimum investment of Rs 1,000, where the subscriber is free to withdraw his/ her entire corpus at any point in time. No tax benefits are available in this account.
Various Schemes Under the NPS
There are four asset classes under the NPS — equity (E), corporate debt (C), government bonds (G) and alternative investment (scheme A). Schemes under each of the classes has two tiers. In the NPS, there are multiple pension fund managers and investment options. The subscriber first selects the fund manager, and then he/she has an option to select any one of the investment options.
What Is The NPS Ratings System?
The ratings system will help subscribers have a better idea of the risk involved in their investments under the NPS. They will be able to take a better decision on the allocation of investment to various asset classes schemes at the time of enrolment into the scheme and at the time of making subsequent contributions to the schemes.
The new rules mandate six levels of risk — Low Risk, Low to Moderate Risk, Moderate Risk, Moderately High Risk, High Risk, and Very High Risk. Based on the scheme characteristics, pension funds shall assign risk levels for the Schemes E-Tier 1, E-Tier 2, C-Tier 1, C-Tier -2, G-Tier-1, G- Tier-2 and Scheme A, according to the circular.
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