Once you visit the PoP, you will have to fill in the prescribed form and submit the required documents. Your account will then be registered.
As of now, only Tier I accounts are available and these are non-withdrawal accounts.
Once registered, the Central Record-keeping Agency (CRA) will send you a Permanent Retirement Account Number (PRAN) along with telephone and Internet passwords.
The online site is: http://npscra.nsdl.co.inAny citizen of India can be part of the New Pension Scheme (NPS). The only criteria: you must be between 18 and 55 years of age. Even non-Resident Indians (NRIs) can apply. But they must have a local bank account and also be Know Your Customer (KYC) compliant.
In this feature, we answer the six most relevant questions concerning it.
Where do you go to open an account?
You will have to approach any of the Points of Presence (PoP) across the country.
These are run by Allahabad Bank, Axis Bank, Citibank, ICICI Bank, IDBI Bank, IL&FS, Kotak Mahindra Bank, Life Insurance Corporation (LIC), Oriental Bank of Commerce, Reliance Capital, South Indian Bank, State Bank of India (SBI) and its associates, Union Bank of India and UTI Asset Management.
You can locate them online at: http://npscra.nsdl.co.in/modules.php?name=Content&pa=showpage&pid=191
In the previous article we had seen how lack of knowledge prevents us from taking the best decision even in case of a simple bank fixed deposit.
We had also asked about the similarity between a bank FD and a bond paper? Let us take this discussion forward today.
A debt paper is a paper issued by the borrower to the lender when he takes a loan from the lender. The debt paper mentions the amount of money taken as loan (par value of the paper), the period for which the loan is taken (term to maturity) and the rate of interest which the borrower will pay to the lender (coupon).
A bank FD also has the same three features. The only difference in the two is that while a debt paper is traded in the market, a bank FD is not tradable. However, that does not prevent us from taking the analogy forward.
In the previous article we had seen that by investing in Rs 100 in a one-year bank FD at 12 per cent in 2000 and then rolling it over for another year in 2001 and 2002 at 10 per cent and 8 per cent respectively, we earned Rs 30 in three years on our investment of Rs 100.
Just imagine what would have happened if we would have invested Rs 100 at 12 per cent in 2000 for a three year period? At the end of 2002, we would be having Rs 36 as interest as against Rs 30! On an investment of Rs one lakh this would mean a difference of Rs 6,000. And we have not used the effect of compounding yet (see related link: The magical power of compounding)
Similarly, we saw that by investing Rs 130 at 6 per cent for 10 years, we had lost on the rising interest rates. Again our money was growing at a slower rate than the rest of the market.
The lesson to be learnt here is that even when investing in a bank FD, we must have an idea on where the interest rates are headed.
As interest were expected to head down in 2000 and 2008 (these are the indications which we had spoken about in the earlier articles. Please read the article on repo, revere repo, CRR (see related link: Understanding repo, reverse repo and CRR), etc to understand how to read these indications), we would have been better off by investing in bank FDs of longer duration.
Similarly, from 2003 till 2008, we would have been better off by investing in bank FD with shorter duration as we would have got our money back faster, and every time the rates went up, we could get the benefit of these high interest rates.
True no one can time the markets.
In 2000 no one knew that by 2003 rates would have bottomed (reached their lowest and once again begun their upward journey), but it is safe to assume that it will take around 5 to 10 years for the rate cycle to reach where it was. Say, if we had invested in 2000 at 12 per cent for 10 years, then even today our money had been growing at 12 per cent!
Similarly, for somebody who invested from 2003, s/he could have easily invested for 10 years in 2008 at 10 per cent. But banks were also advertising 10 per cent in 1,000 days. Any seemingly logical investor would ask the question: why should I invest for 10 years at 10 per cent, when I am getting 10 per cent for less than 3 years?
Another question that should have been asked is: why is the bank paying 10 per cent for 2.7 years (1,000 days)? Reasons were a plenty for that, but had anybody invested Rs 100 in such a scheme, then s/he will face the problem, which we discussed in the previous article.
After 1,000 days, when any investor gets Rs 27.5 on her/his Rs 100 investment, s/he cannot reinvest the same at 10 per cent. Interest rates on FDs have already come down and are set to come down even more, and it still far from 1,000 days!
Thus a simple rule in investing in any fixed income investing (be it bank FDs or bonds) is that if interest rates are expected to head down, increase the duration of your investment and if rates are expected to rise, reduce the duration of your investments.
So in a falling interest rate scenario, buy long-term bonds and in a rising interest rate scenario, buy short-term bonds. Since we cannot buy bonds directly (we can actually, but we do not get into that right now), this analogy should be used to buy long-term and short-term bond mutual funds.
Thus we have understood that interest rates are critical for investing in fixed income investments. Let us see how to apply this bit of knowledge and see whether it really works!
A look at the chart below highlights what we have said above. The chart below is drawn using data from the fund fact sheet of an Indian mutual fund for the period of January 2008 till May 2009.
As can be seen the period from January 2008 till July 2008 saw the fund manager reducing the maturity of his scheme. This was the time when a section of the markets were largely expecting that interest rates would increase due to high inflationary concerns. In January 2008, there was an expectation that Dr Yaga Venugopal Reddy (Governor of Reserve Bank of India [Get Quote] then) would cut repo rates, and that is what must have prompted the fund manager to increase the maturity of his portfolio in January. However, after January 2008, there was a sharp reduction in the average maturity on expectations of a rising interest rates.
After July 2008, the fund manager consciously raised the maturity of the scheme, as markets started anticipating an interest rate cut. This was also the time when the scheme's net asset value (LINK), NAV, shot up, as can be seen from the blue line in the chart.
Again from January 2009, the fund manager has actively reduced the average maturity of holdings, as by and large it was expected that rate cuts were done for and were expected to not fall much, hence there was no point in holding long-term bonds.
The NAV of the scheme has also started slipping from its highs since January 2009.
So, what we have said in the previous two articles about investing in fixed income instruments indeed holds true.
The irony is that while the fund manager was increasing maturity of his holdings from July 2008 onwards, we were actually withdrawing money from the scheme.
Please refer to the chart in the first article which shows how investors actually entered after the rally was over! It was not before October 2008 that money started coming into this scheme and the sad part was that when the rally was over in December 2008, maximum money entered at that point.
Mutual funds are products designed to help us make our money grow by taking professionals help. But that does not mean that just because professionals are managing our money, it will automatically grow!
In fact, the above chart shows how wonderfully the fund manager managed the interest rate movements and thereby generated such stellar returns and the chart in the first article shows how we as investors, due to lack of basic knowledge of investments, entered late!
At least now let us realise the importance of education and financial literacy. Remember: nobody loves your money more than you do.
In the next article we will look at the above chart in greater detail. We will also look at a frequently used term in this article 'average maturity'.
The first two points are explained in the first two articles (see related links) with examples and data whereas the last point was explained in the previous article using a simple hypothetical example.
Readers are requested to read all the three articles before proceeding because this article is a continuation of the previous three.
Let us try to understand basic bond market today before going into selection of debt schemes.
As mentioned in one of the previous articles, debt is nothing but a loan and any loan has the following three salient features:
Take the case of a bank fixed deposit. If we deposit Rs 100 in a bank for one year at 9 per cent, the bank is the borrower and we are the lender/ depositor. The FV of the FD is Rs 100, term is one year and coupon or rate of interest is 10 per cent
If we take a housing loan of Rs 20 lakh for 20 years at 10.75 per cent, it is still the same.
If I borrow Rs 100 from my friend for one day it is also a loan where the term to maturity is extremely small (24 hours) and the rate of interest is 0 per cent, as my friend will (hopefully) not ask for any interest.
So we have established that a loan will always have the above three features.
Borrowers may need money for any period of time. In some later articles we will focus on types of short-term and long-term instruments. For the time being let us assume that we are in the calendar year 2000 and we have Rs 100 to invest. We do not need the money immediately and hence we can afford to invest for a very long time. All the rates of interest used in the example are very close to real ones existing at that point of time. Some calculations have been ignored to make things simple.
Say we go to the bank and listen to the banker's suggestion that we invest the Rs 100 in a one year FD at 12 per cent. After one year, that is, in 2001, we get our Rs 112 and since we do not really need the money immediately, we again take the banker's suggestion.
The banker tells us to again reinvest Rs 112 in a year FD at 10 per cent. When we ask why 10 per cent this time around and not 12 per cent, the banker tells that interest rates have fallen. So we reinvest the Rs 112 at 10 per cent and after one year, that is, in 2002, we get slightly more than Rs 10 as interest. So, in 2002 we have Rs 122 with us, which we again reinvest at 8 per cent this time around for another year. By the time the FD matures, we get Rs 8 on our investment and thus after 3 years we have earned Rs 30 on our investment of Rs 100!
By the time 2003 is over, we have learnt one lesson that the banker who was suggesting us to invest for one year at a time was not giving the best advice, because every time we reinvested, the FD rates had come down as compared to the previous year; and we therefore choose to ignore him here onwards. We are so frustrated with these falling rates that we start fearing that the rate will continue to go down, and hence we invest our Rs 130 at 6 per cent for the next 10 years!
And what happens after that? As luck would have it, interest rates start moving up from 6 per cent in 2003 all the way to 10 per cent till 2008!
The familiar feeling of being the targeted one comes back to us. Why is it that this always happens with me? Why is it that when I invest for the long term the FD rates start moving up?
As mentioned in the previous articles, if only we devoted some of our time in understanding the language of money, we would be in a much better position. We will take this analogy of bank FD to debt markets in the next article, where we will again revisit the most important point in bond markets -- when rates go down, bond prices go up.
Till then think about this: is an FD in any way similar to a bond/ debt paper? Would you have liked it if you would have known earlier that interest rates would be going down from 2000 and would be rising from 2003 and again start falling from 2008? If you wanted to invest Rs 100 in a FD in 2000, what strategy would you have adopted?
Next article we will discuss these points. Do mail your answers. Remember if you love your money, you have to give it time, you have to understand it and you have to understand its language. Investing is not easy, but it is not so difficult either as it is made out to be!
In the previous two articles (see related articles) we had shown how bonds as an asset class have outperformed in the last few months of 2008. However, our objective never has been to give tips to investors; we instead believe in educating investors and making them self-reliant. Today we discuss some bond basics.
Let us say I approach you for a Rs 100 loan for one year period and I promise to pay you 8 per cent as interest on the same (ie I approach you with a debt paper which has face value of Rs 100, maturity of one year and it pays interest of 8 per cent). This means that if you invest Rs 100 today (and buy the paper), you will get Rs 108 after one year (as I will pay you Rs 8 interest as well as repay your principal of Rs 100).
Conversely it means, if you want Rs 108 after one year, then you need to invest Rs 100 today for one year, as your money will be growing at 8 per cent per annum.
In bond terminology, the Rs 100 which you give today is known as the present value of future cash flow which you will receive; ie Rs 108. You have learnt this in Class VIII; it's simple mathematics.
If this is clearly understood, then let us assume that interest rate falls to 7 per cent immediately after you give me Rs 100.
Now you have got an asset in your hand (the debt paper), which delivers higher returns (8 per cent) than the prevailing market rate (7 per cent). Obviously, if you wish to sell this paper now, you will not be selling that paper to anyone at Rs 100, but at a rate slightly higher than Rs 100. But why will this happen, you may ask?
As you have a paper, which delivers higher returns than comparable papers, you will charge a premium in case you want to sell this paper -- that's logical.
If anyone invests Rs 100 today in some paper, other than the one you have, he will get only Rs 7 after one year (as rates have now fallen to 7 per cent); so how can you sell your paper to him at Rs 100, when it will give him Rs 8 as interest after one year? You will obviously ask for some price higher than Rs 100! How much higher?
The paper will give you Rs 108 after one year. This has not changed -- we had mentioned in the previous article that the face value and the coupon of a bond paper does not change -- however the rate at which your money grows has changed.
Earlier you money was growing @ 8 per cent per annum, now it is growing at 7 per cent per annum. So, if an investor wants the same amount (Rs 108) after the same period of time (one year), then obviously s/he will have to invest more today to reach her/his target, as now her/his money will be growing at a slower pace.
If you do some quick calculations then you will have to invest Rs 100.93 today to get Rs 108 after one year, if interest rates were to fall to 7 per cent from 8 per cent. Thus you will sell the paper at Rs 100.93 and not Rs 100.
What does this mean? This means: when interest rates fall, bond prices move up.
This is a very important logic in bond markets. Markets were expecting in July 2008 that going forward interest rates were all set to fall in a big way. Bonds started rallying (prices increased) from July itself, although interest rate cuts started only from October 2008.
Not many people must have advised you about bond funds in July 2008. by the money flowing into gilt schemes in December 2008 proved this -- after the rally was over (refer to the chart in the first article for both these points)!
As mentioned earlier, we are not at all into giving advice. We want you to learn. We want you to ask the right question: why this will happen, how to benefit from this fact, how to choose a bond fund, which bond fund will perform and which one will not are some questions which we will answer in the next article.
Till then seek these answers, and invest with knowledge. A knowledgeable investor is an empowered investor who can take independent decisions in a wiser manner; because nobody loves your money more than you do!
Cash reserve ratio (CRR) is that slice of a bank's deposits, which the bank has to compulsorily deposit with RBI.
A CRR of five per cent means that out of every Rs 100 which the bank gets as deposit, Rs 5 have to be deposited with RBI. Interestingly, RBI does not pay any interest on this money to banks. When RBI wants to reduce liquidity from the system, like in times of high inflation, it increases the CRR.
While repo rate acts as an indirect measure to control liquidity, CRR is a blunt weapon, which directly sucks liquidity from the system.
Consequently, when RBI is adopting an expansionary monetary policy, that is, when reviving growth and reducing inflation is not the main agenda, the CRR is reduced. Again, this has a direct and immediate impact on the liquidity.
In times such as these, when banks have plenty of funds but not much demand for money, they buy G-Secs more than the stipulated 24 per cent with the excess cash. As seen in the previous article, when interest rates go down, bond prices go up. So banks make a lot of money by their treasury operations in a falling interest rate scenario.
In this quarter (a three-month period after which most companies announce their results) keep an eye on bank results, and you will see the 'other income'; that is, treasury income contributing to banks' profits.
As interest rates reach their lows and consequently bond prices reach their highs, banks sell G-Secs (that is also the time when bonds are making headlines and sadly average retail investors are entering then, as was shown in the previous article!) and keep money ready for lending. This is because low interest rates attract consumers and corporates and banks start advancing loans to these entities.
This is not something new. Banks make money when rates are high as well as when rates are low. This has been happening for years. And if banks can do this so can we. But how many of us do this?
It is only the lack of knowledge of this language of money that the average investor never makes big money out of this 'officially available insider information'. Retail investors invest on some silly 'tips' or 'inside information' from their brokers but conveniently ignore such big tips the biggest insider in the economy -- RBI -- gives.
In the next article we will focus on the mathematics of debt markets. We have been saying that bond prices are inversely proportional to interest rate movement. In the article next week we will see why this happens.
Reverse repo is that rate which RBI pays to banks.
When banks have surplus liquidity and there are not enough borrowings from banks by consumers (as is the condition now), banks park their surplus money with RBI and earn some minimum interest. The rate at which RBI pays interest is known as reverse repo rate.
It is only logical that repo rate will always be more than reverse repo rate.
When RBI wants the economy to grow, it will reduce reverse repo rate (as was seen recently in April). By doing so, it will give a signal to banks that instead of deploying surplus money with RBI for a low return they should deploy the same in projects in the economy, which will help to kickstart the economy.
In times of ample liquidity, repo rate is practically redundant. Hence you will observe RBI focusing more on cutting reverse repo rates in times of slowdown, as was seen in the recent past.
