How NPS is Outperforming Other Investment Schemes
National Pension Scheme is an investment vehicle sponsored by the Government. The scheme allows individuals to contribute funds regularly until retirement. On retirement, subscribers can withdraw 60% of their corpus, and 40% goes towards an annuity for a regular income afterward. Any Indian citizen who is between the age of 18 and 60 can join the National Pension Scheme. Launched in 2004 for government employees, the scheme was opened for all in 2009.
You can join the scheme through entities known as Point of Presence (POP). Most private and public sector banks, as well as financial institutions, are enrolled as POPs. One can find POPs on the Pension Funds Regulatory and Development Authority (PFRDA).
People often can’t think far ahead when investing. Retirement schemes are not preferred since they think the money would be locked in for a considerable amount of time. There are a lot of advantages to saving for retirement. With a portion of your money saved every month, you can build a substantial corpus and won’t need to work after retirement to sustain the same lifestyle you were living while working. People should look ahead into the future and start investing in NPS investment vehicles.
NPS has two accounts: Tier I and Tier II. Tier I accounts have many tax benefits, but there is a significant restriction on withdrawing money from the account before retirement. On the other hand, Tier-II accounts offer no tax incentives, but the withdrawal policy is not rigid. Tier II is a voluntary account. Those who have Tier I accounts can choose to open a Tier II account. Tier I accounts can be opened with only Rs. 500, while Tier II accounts can be opened with Rs. 1000.
The triple tax benefit attracts a lot of people towards National Pension Schemes. NPS contributions are deductible under Section 80C. Next, after exhausting the 1.5 lakh ceiling on 80C, one can claim Rs.50,000 additional deduction under Section 80CCD (1B). Lastly, if the employer signs up for NPS and contributes 10% of the employee’s salary towards NPS, there is an additional tax deduction under Section 80 CCD(2).
There are three lifecycle funds - aggressive, moderate, and conservative. The aggressive fund allocates 75% to equity, the moderate fund allocates 50% to equity, and the conservative fund allocates 25% to equity. Studies have shown that rebalanced portfolios do better than static portfolios in the long run. A portfolio should be rebalanced every year to accommodate the various shifts in a market. The corpus is automatically rebalanced every year to suit the dynamic financial environment.
There are a lot of misconceptions about NPS schemes. They are often seen as low risk - low reward. In reality, they provide better returns than other favored investment schemes. Let’s look at the most common form of investment: Fixed Deposits (FD). 10-year FD returns of the most popular banks are: SBI - 5.40%; HDFC - 5.50%, ICICI - 5.50%, Axis - 5.50 %. Even when inflation stays low, you’ll barely beat it. With coronavirus strangling the economy and people flocking to conventional investments, FD rates will fall more in the future.
On the other hand, SBI NPS Tier-1 Scheme A has had an annualized 3-year return of 10.94% since inception. The low-risk UTI NPS Tier-1 Scheme C has an annualized return of 9.22% in the last five years. HDFC Tier-1 scheme C has given an annualized return of 10.01% in the last five years. The lowest risks Tier-1 schemes consistently beat the market, and the higher risk schemes provide returns well worth the risk.
NPS Tier II schemes may not provide tax incentives, but they are a highly lucrative investment vehicle. With 11.11% returns in the past one year, they have outperformed FDs and many liquid funds. NPS Tier II accounts have given an annualized return of 9.53% in the last three years, while the annualized return in the last five years stood at 10.20%. Both NPS Tier-1 and Tier-2 funds beat the market consistently.
Ultra-safe NPS investments have fared well over the last few years. Those who have had less equity have had good returns. The equity market has been volatile since the coronavirus outbreak began. Sometimes they may not get high returns relative to other funds when markets tumble, but they do manage to stay safe. In March, most funds suffered when stocks took a nosedive after the first lockdown was announced. Schemes with less exposure to equities came out unscathed from the advent. Low risk and high return have been the hallmark of NPS investment vehicles.
Funds invested in Tier-II provide higher returns than other major investment schemes. The returns are substantial and by the time retirement comes, the corpus is worth its weight in gold. Savings in Employee Provident Fund schemes grow at a snail’s pace. EPF cannot even beat the rate of inflation, let alone the market. Use the various characteristics and benefits of Tier I and Tier II NPS accounts to your advantage.
NPS schemes are managed by highly qualified professionals as well as regulated closely by the PFRDA. There is an investment guideline that has to be followed by fund managers. Investing in NPS is not only safe, but it is also highly lucrative. One should start saving and investing for retirement as early as possible, and investors will not be disappointed by opening an NPS account.
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