NPS account allows equity exposure up to 75 per cent and one can choose that while opening the NPS account. One can easily invest in an NPS account for thirty years.
New Delhi: National Pension System (NPS) is a market-linked retirement-oriented investment instrument. Under this scheme, the investor is given the choice to open two accounts — equity mode and debt mode — in single NPS account. According to tax and investment experts, even if someone has high-risk appetite, they should have fund allocation in NPS as diversification of the portfolio is necessary.
NPS account allows equity exposure up to 75 per cent and one can choose that while opening the NPS account. One can easily invest in an NPS account for thirty years. At the age of 30 when you start investing in NPS, you can manage to save around Rs 6,000 per month or Rs 200 per day to accumulate a corpus of over a crore rupees. You must remember that the most important part in NPS account opening is choosing the annuity option. Most experts advise people to choose 40 per cent annuity.
If an investor chooses 40 per cent annuity and opens NPS account at the age of 30 with a monthly NPS contribution of Rs 6,000, then the NPS calculator suggests that the investor will get Rs 1.36 crore maturity amount at the time of retirement and will get a monthly pension of Rs 27,352, assuming 10% rate of return on investment and annuity rate of 6 per cent.
The NPS calculator suggests that this Rs 6,000 per month investment trick while opening the NPS account would result in one investing Rs 21.60 lakh in NPS account in 30 years and in return, they will get a maturity amount of Rs 1,36,75,952 or Rs 1.36 crore and Rs 27,352 monthly pension.
Remember that this pension calculator illustrates the tentative Pension and Lump Sum amount an NPS subscriber may expect on maturity or 60 years of age based on regular monthly contributions, percentage of corpus reinvested for purchasing annuity and assumed rates in respect of returns on investment and annuity selected for.
High risk, high rewards:
As per experts, if someone has high risk appetite, then he or she can choose the highest 75 per cent equity exposure of the pension scheme. By doing that, one would be able to get 25 per cent debt exposure, which is the least debt exposure one can opt for while opening the NPS account.
As to how 75:25 equity-debt ratio will reflect in NPS return, experts say that one can expect at least 12 per cent return in equity in long-term while in debt instrument, an average 8 per cent return can be expected. Since in this case, the ratio is 75:25, 12 per cent equity will translate into 9 per cent (12 x 0.75) while 8 per cent debt return will translate into 2 per cent (8 x 0.25). This means, the investor can expect around 11 per cent return on one’s money if the equity debt exposure is 75:25.
Now, assuming 11 per cent NPS interest, if an individual starts investing Rs 6,000 per month in NPS account at the age of 30, they would be investing in NPS for the next 30 years. In that case, the NPS calculator suggests that if the investor has chosen 60 per cent withdrawal at the time of maturity, the NPS withdrawal amount will be Rs 1,01,88,821 or Rs 1.01 crore while one will get monthly pension of Rs 33,963. The monthly pension of Rs 33,963 comes from Rs 67,92,547 that will be used for annuity buying.
Low risk-low reward:
However, in case the NPS investor has low-risk appetite, they can expect to get around 8 per cent NPS interest. NPS calculator suggests that the net NPS withdrawal amount, in this case, will be Rs 54,01,063 while the monthly pension will be Rs 18,004. The NPS calculator further says that Rs 36,00,709 will be the maturity amount used for annuity buying.
At the time of opening the NPS account, a subscriber has to choose whether they would like to allocate the funds across asset classes or through an auto choice option, which allocates funds in line with the age of the subscriber. In NPS, funds are managed by independent portfolio managers. The subscriber needs to choose the fund manager at the time of account opening.
The subscriber has the option to change the investment choice or the portfolio manager online later, using the NPS portal or by visiting any point of presence of the service provider.