Why Investing In NPS Is A Good Idea

By Sanesh Mathew | August 12, 2016

Should I invest in NPS

Are you serious about your retirement nest egg? Then, you should consider adding NPS investments to your portfolio. We agree that NPS or the National Pension Scheme isn’t going to beat your well-managed portfolio or Mutual Funds. But, it is a low-cost product which is tax-efficient, beats inflation (most of the time) and is an ideal diversification to your portfolio.

We wanted to get some expert opinions on whether it is wise to invest in NPS or not. So, we spoke to two of our experts. Here’s what they had to say.

Ajit Narasimhan, General Manager – Category Management, BankBazaar

NPS, announced by the Government of India, is one of the most important financial structural reforms in our country. As a nation, we are almost certain to hit a pension crisis in the next 20 years, if we do not help citizens build a sustainable annuity cash flow for themselves. India has never had a strong social security net like the 401k benefits in America.

NPS is aimed at addressing this requirement. NPS allows funds to be managed competitively. NPS invests in equity asset classes. That means it could be risky, but it is the best asset class for wealth creation.

There are tax benefits too. Now, your individual contribution is exclusively exempt up to Rs. 50,000. While the annuity component is taxable in the year of receipt, the returns on the equity component will more than adequately compensate this tax impact.

It is ideal for someone in their 20s and 30s to sign up for an NPS, over and above their EPF.

Additional Reading: Opening an NPS Account Online

Sasidhar Vavilala, Head – Campaign Management, BankBazaar

If a customer is looking for ‘forced savings’, then perhaps NPS is the best instrument available today (compared to an EPF & PPF). Though there are limited tax benefits on NPS over EPF, higher returns can cover up for this in the current circumstances.

There is an inherent long-term risk of EPF where the government has to commit to a fixed rate of return, regardless of what rate they are earning money. In case of NPS, it is purely market-linked, so the government is at a lesser risk with NPS than EPF. Having said that, considering the diverse population of our country and vote bank politics, there is a good chance of EPF rates being kept high for the next decade or so. So, EPF is still one of the strong long-term options available to a consumer.

In case of NPS, returns will be seasonality-driven as per market ups and downs. Over a long period of time, overall returns are still expected to be higher than Term Deposits. If one is completely averse to any risk and happy to receive returns better than Fixed Deposits, they can still consider opting for EPF. If one is comfortable with risk, and has good self-discipline, then it may be a good idea to invest in long-term equity (as there are no constraints on when to withdraw, what amount and different tax treatments). By design, the equity part of NPS will be built with low-risk stocks that give moderate returns.

In a nutshell,

  • Those with a low-risk appetite can stick to EPF.  And as long as the government does not change the policy to support vote bank politics, you’ll be lucky.
  • Moderate-risk takers can get the maximum benefit from NPS with forced savings.
  • Self-disciplined high-risk takers can still invest in Equity Mutual Funds and can get higher returns over 20-30 years.

What are your thoughts about investing in NPS? Do you think it is a good idea? Are you thinking about adding NPS investments to your portfolio? Feel free to comment below!

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Sanesh Mathew

About Sanesh Mathew

A talkative sleepyhead, Sanesh, enjoys watching horror movies, listening to music, reading all things related to personal finance and wandering aimlessly (walking meditation, he calls it!). He refers to himself as a 'simple human being with a rather chaotic mind'.

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