NPS has gained a reasonable amount of popularity over the past few years due to high returns generated under the scheme. However, experts believe returns should not be the sole reason to invest in NPS
The equity market hovering around its peak has benefitted the equity scheme, Scheme E of National Pension System (NPS), significantly. The government’s pension scheme has shown stellar performance as the equity schemes gave double-digit returns of up to 60 per cent in the last one year. In the Tier 1 Account of NPS, LIC Pension Fund has delivered the highest returns of 59.56 per cent, followed by ICICI Pru Pension Fund (59.47 per cent) and UTI Retirement Solutions with 58.91 per cent returns. A Tier 1 NPS account is the basic retirement account that is mandatory if you want to avail NPS benefits. The returns of NPS equity schemes are in line with the benchmark returns. Equity schemes in Tier II Account of NPS, which is the add-on account that provides the flexibility to invest and withdraw from various schemes available in NPS without any exit load. Tier I Account of NPS has a lock-in till 60 years of your age unless you extend it, but there is no lock-in period for Tier II Account.
NPS has gained a reasonable amount of popularity over the past few years due to high returns generated under the scheme. However, experts believe returns should not be the sole reason to invest in NPS. Unlike mutual funds, NPS does not provide a lot of flexibility to investors in terms of investment and redemption.
“With NPS, you are not allowed to redeem your entire investment before completing at least 10 years or reaching 60 years. In addition, the maximum equity exposure in NPS is capped at 75 per cent of your total money invested in NPS,” says Prateek Mehta, Co-Founder and CBO, Scripbox. It means that you will mandatorily need to have some fixed income exposure too. This restricts long-term growth potential for investors with an aggressive risk profile and a long investment horizon.
One of the core objectives of any retirement specific portfolio, says Mehta, is to stay ahead of inflation. “Over long periods of 10-15-20 years, equity assets work best in achieving this goal,” he adds.
However, NPS is a good investment option for conservative investors. Also, NPS does have certain exclusive tax benefits. It has the provision to give you a higher tax deduction of up to Rs 2 lakh under Sec 80C as compared to Rs 1.5 lakh for ELSS schemes offered by mutual funds. Another advantage is that you can take a maximum of 60 per cent of your total corpus out as a lump sum at maturity tax-free.
Thus, those looking to maximise tax benefits may invest additional Rs 50,000 in NPS, after extinguishing Rs 1.50 lakh under Section 80C in other suitable investment and expenditure options.
No single best retirement scheme
There is no single scheme that is the best but rather an effective inflation-protected portfolio that can serve in a changing investment environment. Such a portfolio will have adequate exposure to both equities, to beat inflation and fixed income, and to provide stability as per a person’s risk profile and needs.
Retirement saving is, first of all, a lifelong process. Before you start building your nest egg, you need to calculate how much you would need post-retirement. You also need to keep re-assessing this at regular intervals depending on how your lifestyle evolves over time.
“One rule of thumb suggests building a retirement nest of 25-30x the annual expenses at the time of retirement. The idea is that you build a kitty large enough to generate income at least equivalent to that of your expenses (at the time of retirement). If you have any liabilities or any other planned large expenses, you should add that over and above this,” says Mehta.
Once you’ve set this financial goal in place, you can start thinking about asset allocation — and this may depend on your age and life-stage. For example, explains Mehta, if you’re between the ages 35-45, you can allocate 60 per cent of your savings to equity funds, and 40 per cent to debt funds. Exposure to equity is, in most cases, essential for retirement savings as they help you beat inflation over the long-term. In our assessment, inflation is your number one concern when saving for retirement.
Your asset allocation should ideally change as you near retirement such that you limit the impact of market volatility on your retirement corpus.