NPS or National Pension Scheme is a voluntary, government-sponsored, defined savings plan. Launched in the year 2004 by the Government of India. NPS primarily aims to help people accumulate funds for their retirement years. Initially, the scheme was only available for salaried individuals. However, presently, any resident or non-resident Indian between the ages 18 and 65 can contribute voluntarily in an NPS scheme during the working years of their life.
Here is everything you should know about NPS, who should invest in NPS, and if it is a good investment option:
What is NPS? How does it work?
As mentioned, NPS is a government-backed voluntary savings plan, where you can invest a defined sum at a pre-agreed frequency. The primary objective of NPS is to create a retirement corpus and provide regular income during the non-working years of life.
Like mutual funds, even in an NPS plan, your money is invested in a pension fund comprising a diversified portfolio of securities, such as shares, bonds, and alternative assets (real estate, gold, etc.). Your money grows through investment in these securities, offering market-linked portfolio returns. NPS also offers tax advantages and flexibility of investment.
NPS plans are regulated by the Pension Fund Regulatory Development Authority of India (PFRDA). Yearly, you have to contribute at least Rs. 1,000 in your NPS account. Moreover, during retirement, you can only withdraw 60% of the NPS corpus. The remaining 40% is used to buy an annuity to provide regular income.
Who should invest in NPS?
NPS investments are ideal for the following type of investors:
- Low-risk appetite: NPS plans limit the equity exposure of your portfolio to 75% of the corpus. This helps to contain the market risk. Further, NPS plans offer automated reduction with age. To shield your retirement corpus from market volatility, NPS has an in-built risk reduction strategy, where your portfolio’s equity exposure is automatically reduced as you grow closer to retirement.
- Decent returns: If you are a low-risk investor aspiring for decent investment returns, you can invest in an NPS plan. On average, NPS plans generate returns between 8-10% annually.
- Cost-effective retirement plans: NPS is a preferred investment option if you are looking for cost-efficient retirement solutions and can opt for long lock-in periods.
Is NPS a good investment?
As an investment scheme, NPS offers various advantages such as:
- Investment ease and convenience
- Voluntary contributions
- Freedom to create and rebalance the portfolio
- Contained risk
- Attractive returns
- Investment transparency
- Low account management charges
Apart from these benefits, NPS is also a good investment because it offers tax advantages. NPS investments up to Rs. 1.5 lakhs are tax-exempt under Section 80C. Further, you can also get a tax deduction of up to Rs. 50,000 under Section 80CCD (1B).
Conclusion
Overall, NPS is a good investment option if you are a low-risk taker. However, if you want high returns (between 12-15% annually) with minimal investment, consider investing in mutual funds. Mutual funds offer professional fund management, shorter lock-ins, investment ease and flexibility, and tax benefits. Moreover, you can create a portfolio aligned with your risk tolerance to minimize losses and maximize gains. Further, unlike NPS, managing mutual funds is convenient through the Tata Capital Moneyfy app. The Moneyfy app allows you to research, invest, monitor, and manage your mutual fund investments anywhere, anytime.
