National Pension System (NPS) subscribers will now be able to make informed decisions regarding the allocation of their contributions to various asset classes as per a report published in the Financial Express.
This is because pension fund houses will now be required to disclose risk profiling of all the schemes on their websites within 15 days from the close of each quarter. The Pension Fund Regulatory and Development Authority (PFRDA) has issued guidelines underlining six levels of risks—low, low to moderate, moderate, moderately high, high and very high, the report said.
Pension funds will have to assign a risk level for the seven schemes based on the scheme characteristics. For debt (corporate bonds and government securities), the risk profiling would be on credit risk, interest rate risk and liquidity risk. For equity, parameters for risk profiling would be market capitalisation, volatility and impact cost.
Based on the conservative credit rating of the instrument, the credit risk values ranging from 0 to 12 will have to be assigned. Credit risk of 0 would indicate the highest credit quality while a credit value of 12 would indicate the lowest. The portfolio’s credit risk will be done by aggregating the credit risk value of the securities and their allocation in the portfolio. The price of the debt instrument to be considered for calculating assets under management will be based on a clean price, it further said.
The credit risk of debt securities for government securities/state development loans/tri-party repo will be 0. For AAA it will be 1; AA+ it will be 2 and so on. For the interest rate, the risk will be valued using the Macaulay Duration of the debt portfolio. The liquidity risk of the scheme will be measured by considering the listing status, credit rating and structure of the debt instrument.
Risk profiling for equity
Financial Express said, for equity, the risk profiling would be done on parameters such as market capitalisation, volatility and impact cost or liquidity. The list of top 100 stocks and beyond top 100 will be defined by NPS Trust on a semi-annual basis. The market capitalisation of the stocks considered for the valuation will be the average of the market capitalisation in the last six months. The volatility would be based on the weighted average of volatility values (<1% will be 5 and > 1% will be 6) of each security.
For schemes holding units of mutual fund schemes, the values will be assigned based on the risk-o-meter of the schemes. For instance, low risk will be assigned 1; low to moderate will be assigned 2; moderate will be assigned 3; moderately high will be 4; high will be 5 and very high will be 6. Investments in REITs and InvITs will be given a score of 7 from a risk perspective. Investments in alternative investment funds (AIFs) will be given a score of 8 from a risk perspective.