The National Pension System (NPS) is creating a positive buzz in the financial circles lately. The Pension Fund Regulatory and Development Authority (PFRDA) recently announced that some of NPS' funds have delivered double-digit returns of between 12% and 14% for the financial year 2012-13.
Other developments such as additional tax relief to employers as well as their NPS contribution for employees, too, have helped. "One of the biggest push for this product has come from the corporate NPS option, which makes it very convenient and tax-efficient if an employer enrolls under the corporate NPS scheme and contributes to the employees' account," informs Vineet Arora, executive vicepresident, ICICI Securities.
NPS has not found much favour with financial advisors since it was extended to all Indian citizens in 2009. Financial planners have often cited NPS' restricted equity exposure (maximum 50%) and distribution issues as hindrances to those planning for a longterm goal like retirement. However, lately some investment experts concede that NPS merits consideration, but not merely because of its recent showing.
"While evaluating the relevance of a product, one should not look at the short-term returns alone. Rather, the product needs to be evaluated on fundamentals and suitability," says Kapil Narang, chief operating officer with financial planning firm Ameriprise India. That is, you need to ascertain whether the product structure, costs and features complement the objective for which it is launched.
Likewise, you need to ensure that the features suit your risk profile, financial goals and investment horizon. An evaluation of the advantages and drawbacks, therefore, is a must before zeroing in on any investment avenue. First, the positive factors. It is cost effective, despite the designated pension fund managers now being allowed to prescribe their own fee, subject to the ceiling of 0.25%.
"Its fund management charges are among the lowest in the space even now. NPS is a good long-term product and hence, investors should use it to invest a part of their retirement-oriented investment. Also, the lock-in feature of the product provides the benefit of compounding," says Arora. "NPS levies the lowest fund management charges compared to any pension/fund management scheme. This makes it cost-efficient and, also, low expense ratio means additional returns for the investor. It is also professionally managed by renowned fund managers in the country," adds Narang. Other charges could include registration and transaction fees.
Second, it offers flexibility of choosing from various combinations of debt and equity plans. However, as said before, the maximum exposure to equities is limited to 50%. If you want to avoid micro-managing your investment, you can simply opt for the life cycle strategy that automatically decides your asset allocation, depending on your age. Then, there are tax benefits.
"If you take the NPS benefit through your employer, you are eligible for additional tax deductions (over and above Sec 80C) of up to 10% of your basic pay," informs Narang. However, the grand retirement scheme is not without its share of limitations. The key one, of course, is the cap on maximum exposure that you can take in equities, which stands at 50%.
Now, if you are a young professional willing to stomach risks and stay invested for the long term, financial planners recommend a high equity exposure of 60-70%. Such investors may not find NPS' proposition appealing. This apart, remember, if you need funds during a crisis, you cannot tap into your entire NPS corpus.
"If you are investing in NPS, you should be aware that the vesting age is 60 years and prior to that one can withdraw only 20% of the corpus. This may dissuade certain investors as limited liquidity will not make these funds available to you during an emergency," points out Narang. Therefore, if you plan to invest in NPS, you need to be certain that you will not need the funds in the short term.
Moreover, once you turn 60, you will have to compulsorily annuitise at least 40% of your corpus. The balance 60% can be withdrawn as lump-sum. So, while you can look at adding NPS to your portfolio, you should also weigh other avenues. "In the early years, one can focus on investing in long-term equity funds. As one gets close to the retirement age the allocation to debt should be increased. Some good long-term equity and debt products that can be used for investment are NPS, PPF, mutual funds, ULIPS and zero coupon bonds. Among openended products, there are mutual funds, but the investor must be disciplined and continue investing over a long period," advises Arora.
You can choose between these products or opt for a combination of these instruments. "One does not need complex investment products to execute the desired asset allocation. A proper asset allocation and regular re balancing of the portfolio are more important than chasing the best performing instruments or asset classes. All one needs is a stable large-cap equity fund or a large-cap tracking exchange-traded fund (ETF), a short term debt fund investing in high-quality papers, a public provident fund account, a long-term debt fund investing in high-quality papers or a gilt fund and a gold ETF," explains Sudipto Roy, business head, Principal Retirement Advisers.
Term insurance and health insurance, too, are indispensable to any financial planning strategy. "Since any unforeseen event can jeopardise an individual's earning potential, these two insurance products are absolutely critical in a portfolio," he adds.
Source : The Economic Times, 14 June, 2013
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