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At maturity, 60 per cent of the money can be withdrawn as a lump sum while 40 per cent must be invested in annuities, which give a lifelong cash flow.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Money invested in NPS cannot be withdrawn easily before 60.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.
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