Higher expenses on NPS will not materially impact investors

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One of the important factors to consider while selecting an investment instrument is the cost that has to be paid for the investment. The cost is reduced or deducted from the returns that are earned by the investment and the net figure is what remains with the investor. This is why its not just the returns that are important but also the cost as this can change what ends up with the investor at the end of the day.

Permission has been granted to pension fund managers to increase the fees that they charge for managing the National Pension System (NPS). This is a rise from the figure earlier and this has to be seen by investors in the context of what it means for their investment and their final returns. Here is a detailed look at this issue.

Overall cost

The first thing to consider is the overall cost that is now present for the NPS investors. Earlier the management fee that was allowed to be charged was 0.01% of the assets managed by the pension fund managers. Now the entire fee structure has been broken into slabs with the fee structure starting at 0.09% for assets managed upto Rs 10,000 crore going to 0.03% for the amount managed in excess of Rs 1.5 lakh crore. Overall what this means is that there will be a rise in the fees that are being paid by investors in the NPS.

Significance

The key part of the entire analysis is whether this kind of rise in the fees paid is actually significant because the earlier figure was very low at 0.01%. Even if this goes up and comes to an average of say 0.05% or 0.06% then while larger than before it still is not too high. One has to consider this in the context of the kind of fees that are charged by other asset managers. For example a fee of around 2.5% for equity oriented funds and even around 1% plus for debt oriented funds is common. For index funds the fees are lower but very few will actually come to this low figure seen in NPS. 

Viability

Investors should also be happy at the fact that the fees have been raised a bit. This is because the move will make the entire pension business more viable than it was before the hike. This will encourage the fund managers to stay in the business and attract more players. It is also important for the investor that there are good fund managers who are managing their money. This higher fee is an incentive for them too and in that sense this maintains a balance between fees and the costs that the investors can actually bear.

Impact

Since the final impact of this move is not going to be very significant there is not much in terms of changes for the investor. The fees are deducted from the net asset value and the final figure is what is seen by the investors so in that sense they will not even realise that the amount has been charged. But this will not have a material impact as far as the overall returns are concerned. Investors on their part should continue their focus on investing regularly plus selecting the right fund manager and asset allocation mix so that a good corpus can be raised for their retirement.

(The writer is the founder of Moneyeduschool. Views expressed are personal)