18 September 2013

Invest in gilts through pension scheme :: Business Line


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With goverment bond yields at a high 8.5 per cent, this is a good time to add gilts to your pension fund.
Here’s a quiz. What ultra-safe investment today offers an 8.5 per cent return, with the possibility of capital gains? Well, it’s the ten-year government bond. And you can invest in it through the national pension scheme (NPS).
The NPS may be a long-term product, but it is not a rigid scheme. It gives ample opportunity for you change your asset allocation so that you benefit from good return opportunities in specific asset classes. It also allows you to do it at a pretty low cost.
Debt opportunities
The NPS allows you to invest in equity (E), corporate debt (C) and government bonds (G) in a proportion of your choice, with the option E being allowed to extend up to 50 per cent of your instalment. You can choose to ignore E and invest 100 per cent in the C or G options.
Today, the G option appears quite attractive because government bond yields are poised at 8.5 per cent. If interest rates do decline over the next one year or so, there could be possibility of price appreciation on these gilts as well.
Given that such a situation is likely , how can you make changes to your portfolio to gain from the opportunity?
You can increase the allocation to the G portion of your contribution from, say, 25 per cent levels currently to 40-50 per cent.
It may not be easy for retail investors to buy government securities directly. Buying through the NPS is an easy and passive choice.
Also, despite being a debt investment, you have tax benefits in the form of deductions allowed under section 80C. The gains too are tax exempt as you would not be withdrawing and would merely be rebalancing.
The return from the C option across pension fund managers has ranged from 7-10 per cent compounded annually over the last four-odd years in which the NPS has been in existence. Equity has delivered much lower returns.
The G option would have given 5.2-8.5 per cent returns in this period.
Given that equity has been choppy for 3-4 years now, even from a medium-term perspective latching on to G-Secs or coporate bonds may have been a good idea. Of course, to do this rebalancing, a certain ability to take a call on future prospects of different asset classes is called for, which may not be that easy.
Reallocation inexpensive
The NPS though allows you to change your fund manager and investment option, just once every year. The cost of changing your investment mandate is just Rs 20!
For example post the RBI’s moves in July, funds focused on government securities lost 4-5 percentage points within a couple of weeks, which is nearly half the gains they made over a one year period. If you feel this correction is overdone you can probably increase your exposure to option G as indicated above.
SBI and ICICI pension fund have managed the G portion better than others. So you can also consider changing your pension fund manager for one year to benefit from their style. Changing the fund manager too costs only Rs 20.

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