SEEK CONSISTENCY ACROSS ASSET CLASSES

 

Choosing NPS manager? Seek consistency across asset classes

Switch fund manager only if long-term performance lags the category average

 

Higher equity exposure

NPS offers the comfort of being a government-backed scheme.

While other retirement-oriented instruments like Employee’s Provident Fund (EPF) and Public Provident Fund (PPF) invest primarily in fixed-income instrument, and hence offer fixed-income like returns, NPS can offer higher exposure to equities (up to 75 per cent in the tier I account). Hence, investors can potentially enjoy higher returns over the long term.

Investors under the old tax regime get a tax benefit of up to Rs 1.5 lakh under Section 80C and an additional exclusive benefit of up to Rs 50,000 under Section 80CCD (1B).

The fund management charge is very low in NPS.

At maturity, 60 per cent of the money can be withdrawn as a lump sum while 40 per cent must be invested in annuities, which give a lifelong cash flow. An annuity plan allows the investor to lock in the existing rate of interest for her lifetime. No other investment product in India offers this benefit. Professional fund management and portability between jobs and to its appeal.

Money invested in NPS cannot be withdrawn easily before 60. The money therefore, does not get used up for other purposes. Investors get the benefit of long-term compounding and receive 60 per cent of the corpus tax-free at maturity. 

If you are in the auto-choice option, your funds get automatically rebalanced on your birthday. If you are in the active choice option, you can rebalance on your own without any tax incidence.

Compulsory annuitisation

If the corpus size exceeds Rs 5 lakh at superannuation and Rs 2.5 lakh in the case of premature exit, at least 40 per cent of the accumulated corpus must be used to purchase an annuity. This mandatory annuity purchase requirement might not align with the preferences of those who desire greater control over their retirement’s funds.

Withdrawal rules in NPS are stringent. If you withdraw the money before truing 60, 80 per cent of the corpus must be use to purchase an annuity and only 20 per cent is paid as a lump sum.

The pension funds are actively managed, which means some could underperform their benchmarks.

Ready to forgo liquidity ?

It is a suitable product for anyone who wants to build a retirement corpus. Investors must, however, make sure they have a diversified portfolio outside NPS that will offer them liquidity. Given the stringent lock-in rule, people who could need the money before 60 should avoid NPS.

 

 

Active or auto choice ?

Active choice allows investors to decide their allocation to various asset classes.

It is suited for risk-tolerant individuals who are comfortable with market volatility, as it enables them to allocate a larger portion of their contributions to equity assets.

Market savvy individuals who desire a customised asset allocation, or who wish to have the freedom to adapt their portfolio to market conditions, should go for the active choice option.

This option offers greater flexibility vis-a-vis asset allocation.

The auto-choice option allows investors to choose from one of three life cycle funds. Investors who are not market savvy or don’t want the burden of making active choices should go for this option.

 Look for consistency

When choosing a PFM, use long-term performance data to weed out underperformers.

Thereafter, if you are left with a group whose returns vary within a narrow band, select a PFM belonging to a group well known within the fund management business, which you believe will still be around 50-70 years hence. Look for a consistent performer across asset classes.

Finally, you can change your PFM once a year. Do so only if long-term performance lags the category average by a considerable margin.

 

For More Details: Pooja Manoj Gupta, visit www.giia26.com
Email: pmgiia26.com Mobile  9868944340