The primary purpose of the National Pension System (NPS) was to offer a better return on investment for long-term retirement funds. You can receive a return on NPS depending on the quantum of contribution. The government pension scheme, in the earlier avatar, was restricted to people working for government departments or public sector undertakings. The amount of pension was defined as 50% of the last drawn salary. The burden of funding the gap in pension fund availability and needs would become a part of the government’s annual budget.
NPS has taken this burden off the government's shoulders and opened the opportunity of saving for retirement to all Indian Citizens including NRIs. Thus, you can now benefit from the country’s economic growth over the decades until your retirement. NPS also lets you invest in the relative safety of fixed-income government securities if you want to avoid equity market risks.
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The return on investment in NPS depends on the fund’s performance. A scheme’s market performance is a strong indicator of the average return possible from NPS. The earlier you start investing; the higher the chance of building a bigger retirement corpus.
| Scheme | 1-YEAR | 5-YEARS | 10-YEARS |
|---|---|---|---|
| E | 1.65% | 10.24% | 12.83% |
| C | 2.82% | 7.24% | 9.12% |
| G | 1.56% | 6.81% | 8.63% |
| A | 8.61% | 7.92% | NA |
* CAGR based on historical data provided by NPS Trust as on 11 Aug 2022
You must stay invested for the long run if you want inflation-beating returns. Investing in equity will help you generate wealth faster.
The new NPS opened up the opportunity of earning pensions to everyone irrespective of their profession and employment. The scheme now focused on contribution instead of fixating on outcome. This change meant that the cap on earning pension was now removed. The amount you would receive as a pension post retirement solely depended on the money you invested.
The returns from NPS depend on the performance of your funds in the market. However, you may choose the allocation depending on your risk appetite.
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You may like to know the intricacies of various NPS schemes before selecting one for investing your money. This choice is for you to decide the asset class allocation and choose the ratio in which your contributions would be invested among various asset classes.
However, there are limitations because the maximum permitted allocation to equities is restricted to 75%. Each Pension fund manager has a bouquet of fund schemes that you may select from.
Corporate CG Scheme: For corporates investing in pension funds, PFRDA has launched a new scheme called the corporate central government scheme (Corporate-CG scheme). The new scheme brings parity in fund management charges.
Companies can invest in NPS by choosing either the private sector NPS or government NPS. Both the saving schemes are similar in architecture but differ in investment patterns.
The first is a standard auto-invest option and is useful if you find it difficult to decide on your investments. The second is an active choice option if you want to plan your investments yourself.
Your money will be invested in asset classes in specific proportions basis your age. As you age, exposure to equity and corporate debt gradually diminishes while increasing in government securities.
NPS offers market-linked returns with historical annualised gains of 9–12%, making it a strong choice for retirement planning.
If you are exploring investments to save on tax, the National Pension Scheme (NPS) is a good avenue. Besides tax benefit, NPS also aids in growing your wealth and building a retirement kitty. Some of the other benefits associated with NPS:
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Though the advantages of NPS render it a desirable retirement investment vehicle, it is essential to compare it with other investments:
Employee Provident Fund (EPF) - EPF offers fixed returns with tax-exempt interest and withdrawal. Nevertheless, the returns are usually less than the market-linked growth opportunity of NPS.
Public Provident Fund (PPF) - PPF is a safe investment option with tax advantages, but the lock-in period is higher and lacks the flexibility of NPS.
Mutual Funds - Mutual funds provide high returns but involve high market risk and lack the formal pension benefits of NPS.
ULIPs (Unit Linked Insurance Plans) - ULIPs offer both insurance and investment benefits but tend to have higher charges than NPS.
A key benefit of NPS over these alternatives is its scope for building a bigger corpus through disciplined contributions. Further, the refund of NPS ensures that the contribution made by the investor is not lost, which makes it an even safer bet for building long-term wealth.
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Although, with its features well suited for retirement goals, NPS has few rivals. Unit Linked Insurance Plans or ULIPs from life insurers can compare neck to neck when it comes to long-term investments. Online ULIP plans like Invest 4G from Canara HSBC Life Insurance offer features and benefits well-suited for your retirement goals:
NPS should be one of the several investment assets that you should invest your money in. Diversification is critical for reaching long-term financial goals with minimal risk. Diversification reduces risk by allocating funds across different financial instruments, and investment classes.
Adding investments like ULIP provides you with adequate diversification while maintaining long-term growth. A diversified portfolio opens up more opportunities, reduces stress, and gives sustainable returns.
Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised to exercise their caution and not to rely on the contents of the article as conclusive in nature. Readers should research further or consult an expert in this regard.
The National Pension System provides a regulated and structured means of planning for retirement, to be financially secure in the later years. NPS's advantages of flexible investment alternatives, tax advantages, and market-linked growth make it a suitable candidate in retirement planning. Refunds in NPS also augment the safety of investments, enabling contributors to plan for the future with confidence. But as is the case with any investment, diversification becomes imperative. By complementing NPS with other investments such as ULIPs or mutual funds, you can get an all-around and sustainable retirement strategy.
CAGR (Compound Annual Growth Rate): A measure of investment growth over time, representing the mean annual return rate.
Gilt Bonds: Government-issued securities that are considered low-risk and provide fixed returns.
Lock-in Period: The duration for which an investment remains inaccessible for withdrawal.
Pension Fund Manager (PFM): A regulated entity responsible for managing the investments made under NPS.
Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.
