What are the features and benefits of NPS scheme? Pankaj Mathpal explains

“Basically there are different models for central government as from their salary 10% is deducted and 14% government contributes in that so that is one model,” says Pankaj Mathpal, MD, Optima Money Managers.

Not many people know about the NPS scheme, so please break down NPS for us.
See, NPS is not new now, so I understand that many people know about it, but yes, when it comes to features and benefits and from time to time government announces more changes in that so maybe that we need to explain it again and I have an opportunity.

Basically there are different models for central government as from their salary 10% is deducted and 14% government contributes in that so that is one model.

Then, there is state government model. Many corporates also have adopted it, so there is a corporate model and there is one model called all citizens model, where anyone whether you are in job, whether you are in employment or profession or doing your own business you can open your account in that all citizens model of this NPS.

NPS as you told in the beginning itself that it is an investment plan first, so you accumulate money and at a certain age you transfer that accumulated money to the pension account where you get regular pension. So, if we talk about this accumulation phase where the PFRDA is a regulator and this money is managed through different fund managers, so you have two choices, active choice and auto choice and one thing more one has to understand that in this NPS, there are tier 1 and tier 2.

First thing, when we talk about pension, it is tier 1 and tier 2 is only your savings account where you can deposit money and you can withdraw anytime.

Let us focus on tier 1 which is a pension account and as I mentioned earlier that there are active choice and auto choice. So, in active choice, you can decide that who will manage your fund and how much you will allocate in which asset class and when you go for auto choice, here your contribution in equity, corporate bonds and government securities automatically is based on your age and your allocation keeps changing from time to time.

So, we discuss about the tier 1 which is a pension account and in that, let us talk about this active choice where you decide that how much you want to allocate in which asset class. So, we have here equity, we have corporate bond, then government securities and alternate investment.

So, you have choice to invest your money in different asset classes as per your choice.

So, investors who understand equity market, they want to take a little higher risk can invest in equity allocation more and people who want the lesser volatility in their portfolio, they can invest more in government securities or corporate bonds.

So, you can decide that where you want to allocate. The whole idea is that in long term you accumulate a good corpus and then after age, which is minimum 60 years, at the age of 60 years, you can withdraw 60% of that amount what is accumulated and minimum 40% has to be converted into pension.

When you were highlighting that the investor can actually decide tied on to how much amount they can allocate between the different asset classes, which one amongst them has been the best performer and how to go ahead with the selection process?
This is very important. First thing, if investors or NPS account holders, they do not have much idea about capital market so for them, this auto choice is the best option.

In auto choice, initially your allocation in equity is higher but as the age progresses, your contribution in equity will get reduced and your contribution, means whatever you contribute, more will go into government securities.
So that is the best option. But as we know that equity has potential to deliver better returns in long term, so considering that fact, one can go for active choice.

Now, how much one should allocate, see maximum up to 75% of contribution. For example, somebody decides to contribute every month 10,000 rupees. So 75% of that amount can go in equity. That is the maximum limit allowed to contribute. Now it is up to the account holder or NPS subscriber that how much they want to contribute.
In general, because it is a pension product, so somebody can decide that 50% equity and then out of 50%, they can invest in corporate bonds, government securities and alternative investment. So that can be one choice or when you are young, you can invest total 75% equity.

Later as you grow, you can reduce your exposure to equity. So it has to be decided by the NPS subscriber based on their understanding, their objective, their risk appetite, etc but choice is there’s.

Definitely equity is an asset class which has potential to deliver highest return in long term. And it has been proven here with NPS if we see last one year even, that returns have been around 18% in last one year, means there are multiple fund managers but if you see that Kotak Mahindra Pension Fund, or SBI Pension Fund, the returns have been more than 18% in last one year.

If you see last five years return even, all the fund managers who are managing NPS have been able to deliver around 12% CAGR.

So equity is definitely one asset class one must have allocation in that. After that, because corporate bond here is not like debt category is purely corporate bond. And in corporate bond also, if we see in last one year, the returns have been around 8%.

We see any fund manager whether it is LIC Pension Fund, it been able to deliver 8.33% in last one year, followed by UTI Retirement Solution, where the returns have been 8.25% in last one year.
And if you see five years CAGR, that has also been around 9%. So in that category also means returns are better compared to even fixed deposits.

So that is also a choice and then government securities, where the money is invested in government securities, there also if we see returns in last one year, it has been around 10%. And in five years, CAGR is around again, it is 9%. So if you see any category, returns have been good when we compare with the mutual funds even that these returns are quite attractive.

And last category, which is alternative investment, there we see in last one year, LIC Pension Fund has been able to deliver 6.29%. And UTI Retirement Solution, it has been able to deliver 5.33%.

So these are the top funds in this category. But if we see difference between the best performing and the worst performing, so the difference is very high. If you talk about equity or corporate bond or government securities, returns have been almost same for all the fund managers but here if we see alternative investment, here the difference is very vast because HDFC Pension Fund has been able to deliver 8.56% in last five years.

If you see this SBI Pension Fund manager, in last one year, the return is only 0.97% where the best performing LIC Pension Fund, as I mentioned, delivers 6.29%. So one has to be careful little bit means when you go for different asset classes but otherwise, in general, if you see equity, corporate bond, government securities, returns have been almost same.



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