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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

NEW PENSION SCHEMEFUND MANAGEMENT

Arun Kaul

GM ( Treasury)

Punjab National Bank

fund management issues
Fund management Issues
  • Investment Patterns
  • Fund Management Strategies
  • Performance evaluation
  • Regulatory Mechanism
drawbacks of present pattern
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
proposed investment pattern
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
evaluation of proposed pattern
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
framework for debt investments
Framework for Debt Investments
  • Investment Grade rating
  • Listing at stock exchanges
  • Analysis of Long Term potential and risk of the industry/ sector
framework for equity investments
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
disclosures
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
fund management strategies13
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
fund management strategies14
Fund Management Strategies

ACTIVE FUND MGT.

PASSIVE FUND MGT.

passive fund management
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
active fund management
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
benchmarking for g secs and corporate bonds
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.
performance measurement
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
regulatory issues
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