What are the Different Parameters to Consider When Choosing the Best NPS?
We all dream of having a peaceful life after retirement. However, a chunk of this peace depends on the funds in the kitty or the retirement corpus one has. The National Pension System is among the several financial instruments through which you can build a dedicated retirement corpus to care for your post-retirement needs.
The NPS invests in four asset classes — equity (E), corporate debt (C), government bonds (G) and alternative investment funds (A) — managed by 11 different pension fund managers (PFMs) . The question is how to pick the best NPS funds.
Which NPS scheme is the best? 3 factors to consider
You need to consider several parameters while zeroing in on the best national pension scheme or funds. These include:
1. Understanding the different types of NPS accounts
Before considering the best NPS scheme to invest in, it is crucial for you to understand the different types of NPS accounts. There are primarily two types of NPS accounts - Tier I and Tier II. While Tier I is the retirement account, where your funds remain locked for 60 years, with partial withdrawals allowed under certain cases, the Tier II account is a voluntary account that functions like a regular investment account.
You can withdraw funds from a Tier II account anytime you need it. However, note that you need a Tier I account to open a Tier II account. The table captures the key differences between Tier I and Tier II account:
| Tier I NPS Account | Tier II NPS Account |
|---|---|
Any Indian citizen aged between 18 and 65 can open it | You must have a Tier I account to open tier II account |
Minimum amount to start investing is ₹500 | Minimum amount to start investing is ₹1000 |
Have a lock-in period until you turn 60 | Doesn’t have any lock-in period |
Offers tax benefits under section 80C and 80CCD (1B) of the Income Tax Act | No tax benefits for non-government employees. However, tax benefits are available for government employees under section 80C after 3 years lock-in-period |
60% of the amount withdrawn at maturity doesn’t attract any tax | Funds withdrawn are added to your income and taxed at applicable rates |
2. Determine your risk tolerance
Note that the NPS offers two investment choices - active and auto. In the former, you can actively decide the contribution to each asset class. If you have a high-risk tolerance, you can contribute more towards equity (max 75%).
On the other hand, if you have a low-risk tolerance, you can opt for debt funds. However, note that the total allocation across all assets must be equal to 100%. In auto choice, the proportion of money invested in the asset classes change according to age. Equity exposure decreases with age.
3. Check the fund’s long-term performance
This is another critical consideration. While past performance is no guarantee of future returns, as an investor, it is crucial for you to check a fund's long-term performance — 7 years or 10 years. Whether you invest in an equity fund or corporate debt fund, it is vital to check the fund's long-term performance.
This will help you evaluate how the fund has performed across market cycles. You can check a fund’s performance managed by different PFMs on the website of the NPS Trust, here across different tenures.
In conclusion
The wafer-thin fund management charges of the NPS make it one of the prudent investment vehicles for building a corpus for retirement. As evident, choosing the best NPS scheme to invest in is a culmination of several factors. Irrespective of the fund you choose, ensure you start early to benefit from the power of compounding.
Disclaimer: This article is for informational purposes only and does not constitute financial advice. It is not produced by the desk of the Kotak Securities Research Team, nor is it a report published by the Kotak Securities Research Team. The information presented is compiled from several secondary sources available on the internet and may change over time. Investors should conduct their research and consult with financial professionals before making any investment decisions. Read the full disclaimer here.
Investments in the securities market are subject to market risks, read all the related documents carefully before investing. Please read the SEBI-prescribed Combined Risk Disclosure Document before investing. Brokerage will not exceed SEBI’s prescribed limit.
