The National Pension Scheme (NPS) has undergone various changes since its inception. They are sometimes linked to NPS withdrawal rules, while at other times, they are related to NPS exit rules. This time, however, against everyone’s expectations, the Pension Fund Regulatory and Development Authority (PFRDA) proposed changes that apply to fund managers, but have an impact on subscribers. Before discussing them in detail, let’s first understand what NPS is.
What is the National Pension Scheme?
The National Pension Scheme is a voluntary investment plan launched to secure your retirement. This retirement scheme is under the purview of the central government and the Pension Fund Regulatory and Development Authority (PFRDA). The NPS was initially accessible to government employees, but in 2009, it was made available to all Indian citizens aged 18 to 60 years.
You can make an investment in the NPS until the age of 60 years. After that, you can withdraw 60% of the corpus and use the remaining 40% to buy an annuity plan.
NPS New Rules 2021
Since the launch of NPS, the scheme has seen several alterations. The new ones are listed below.
- Investment in mid-cap stocks
Previously, NPS fund managers were limited to investing in companies that were traded on the Futures and Options market. In addition, the funds must be invested in companies with a minimum market cap of ₹5,000 crores. As a result, the fund managers’ only alternative is to invest in the top 100 large-cap funds. Fund managers can now invest funds in the top 200 companies (100 large-cap and 100 mid-cap).
- Investment in Initial Public Offerings (IPOs)
The new NPS rule permits fund managers to invest in firms that are set to go public, though there is one prerequisite to investing in an IPO. They cannot invest in them if their market capitalisation is less than that of the 200th company from the top.
It means that any large IPO with a market capitalisation of more than ₹21,200 crores can be added to your NPS portfolio.
- Investment in more group companies
Earlier, fund managers could only invest 5% of the equity spread of funds in group companies; the new NPS rule states that the 5% cap applies to the total portfolio rather than just equity.
How Will the New Rules Affect the NPS Subscribers?
- The ability to invest in mid-cap companies has opened up a slew of new possibilities. Between large-cap and mid-cap companies, you will notice that mid-cap companies have more growth potential.
- Companies that are newly listed can give substantially better returns than those that are already listed. However, there are certain challenges in front of NPS fund managers in this case. Even a look into a company’s financials, cannot determine how stocks would be welcomed by investors.
- The permit to allocate more funds towards group companies provides fund managers with more flexibility. As an NPS member, your returns will be multiplied if you have exposure to a group firm with strong growth prospects.
The new NPS rules are mainly related to equities. The broader investment options may improve returns over time. Yet, you must not forget that higher returns come with higher risks, especially in the context of equity. Therefore, as an NPS subscriber, keep track of your investment’s performance. Change your NPS fund manager if you believe your portfolio is underperforming.