WHY NPS SHOULD BE OPPOSED IN GOVERNMENT SECTOR

WHY NPS SHOULD BE OPPOSED IN GOVERNMENT SECTOR

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SAFETY

Poorly chosen bonds can lose more money than equities.

Though stocks are synonymous with risk, even fixed income investments are not completely safe. You can lose money in gilts as well. In fact, the low returns given by various NPS funds are not so much because of equities but because of the marked-to-market losses on gilts and corporate bonds. Bond yields rose sharply in July 2013, resulting in a decline in the value of the longterm bonds in their portfolios.

More than the interest rate risk, there is the default risk. NPS norms allow the pension fund managers to buy bonds with a minimum credit rating of BBB. The lower the rating, the higher is the interest offered. Though BBB-rated bonds are on the borderline, a prudent manager will stay away from such securities despite the lure of higher interest.

“The equity investments are safer than debt investments in NPS,” says P V Subramanyam, financial trainer, Iris. “A fund manager can buy only Nifty stocks but can play around with the quality in debt funds,” he adds. The risk of default endangers 100% of the investment compared to the probability of just 20-25% decline in the benchmark index. Investors end up paying the price when investments become NPAs.
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