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NEW PENSION SCHEME FUND MANAGEMENT

NEW PENSION SCHEME FUND MANAGEMENT Arun Kaul GM ( Treasury) Punjab National Bank Fund management Issues Investment Patterns Fund Management Strategies Performance evaluation Regulatory Mechanism INVESTMENT PATTERN Present Investment Pattern Drawbacks of Present Pattern

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NEW PENSION SCHEME FUND MANAGEMENT

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  1. NEW PENSION SCHEMEFUND MANAGEMENT Arun Kaul GM ( Treasury) Punjab National Bank

  2. Fund management Issues • Investment Patterns • Fund Management Strategies • Performance evaluation • Regulatory Mechanism

  3. INVESTMENT PATTERN

  4. Present Investment Pattern

  5. Drawbacks of Present Pattern • There is a single portfolio option for any investor. He has to invest in the above portfolio irrespective of his risk appetite. • The existing portfolio is almost completely invested in Govt. or Govt. linked securities which result in a low rate of return • The funds have no exposure to equities which does not give an opportunity to the member to have a higher return • The funds are completely invested in Indian securities thus there is no scope for diversification of country or political risk

  6. Proposed Investment Pattern • In the proposed system the investor will have a choice of 6 Pension fund Manager each offering 3 schemes : Safe, Balanced and Growth

  7. Evaluation of Proposed Pattern • In Growth Fund an exposure of upto 50 % in equities is on the higher side. • Equities expose the fund to possible erosion in the contribution of the member • Fund managers may also be allowed to use Derivatives to reduce market risks and Hedge returns • Moreover the guidelines may allow the Fund managers to invest in MBS/ABS and REITS ( as and when introduced in India) which may offer them a higher return while allowing for further diversification in asset class

  8. Framework for Debt Investments • Investment Grade rating • Listing at stock exchanges • Analysis of Long Term potential and risk of the industry/ sector

  9. Framework for Equity investments • Investments may be restricted to Index Stocks • Min. requirements of M-cap can be laid down • Other determinants such as dividend record, position in the segment, CMP/BV and trading volumes can be stipulated to restrict the investments to quality stocks

  10. Disclosures • All the disclosure requirements with respect to Portfolio Composition, Fees & expenses change in investment focus etc. need to be disclosed . Such guidelines can be evolved on the same lines as those applicable to Mutual Funds. • Basic approach of such disclosures should be “Principle” based rather than “rule” based with a view to make available all information relating to the health of the fund

  11. Suggested Investment Pattern

  12. FUND MANAGEMENT STRATEGIES

  13. Fund Management Strategies The basic characteristics of the new pension system: • Defined contribution rather than defined benefit • No assured returns • Passive management for Equity investments

  14. Fund Management Strategies ACTIVE FUND MGT. PASSIVE FUND MGT.

  15. Passive Fund Management • Passive Fund Management has been prescribed for investment in equities. • Such method will definitely keep the management costs down • Moreover it will ease the acceptability of equities as a part of pension fund portfolio in the initial period

  16. Active Fund Management • Active fund management may offer better return because of a wider portfolio choice • However it may expose the fund to the relative competency of the fund manager • Moreover it may be better to go for passive fund management for international investment until the Indian markets develop a mature understanding of International markets

  17. PERFORMANCE EVALUATION

  18. Benchmarking for G-secs and Corporate bonds • Since bonds per se represent the decision of risk aversion hence passive management with respect to some defined index should be used such as CompBEX. • But for the purpose of providing performance measure/ benchmarking to the customer, some hybrid index needs to be developed, which would capture the expected risk and return levels for each investment pattern.

  19. Performance Measurement • If passive fund management is used as the technique, then a key tool to measure the performance of PFM would be tracking error w.r.t. benchmark hybrid index. • Moreover the performance of the PFM should be compared with the respective benchmarks • Such comparisons should be adequately disclosed to enable members make a decision regarding continued patronage of a PFM

  20. REGULATORY MECHANISM

  21. Regulatory Issues • A separate regulator - PFRDA has been envisaged • However the regulatory issues pertaining to PFs are similar to Mutual Funds. Therefore a separate cell within SEBI can serve the purpose • This will save the participants from multiple regulatory jurisdiction and also enable integrated regulatory framework

  22. Thank You

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