Last Updated on
The National Pension System (NPS) was launched in 2004 with the primary objective of offering financial stability to retirees. It is a defined contribution scheme and allows subscribers to invest in various asset classes.
Investors may choose between equity, corporate bonds, and government securities to invest their annual contributions. The primary account under the scheme is Tier I, which requires a minimum annual investment of INR 6,000 and has limitations on premature withdrawals. The optional Tier II account may also be chosen by subscribers to invest any investible surplus they may have.
The NPS had low popularity when first launched; however, the additional tax deduction of INR 50,000 available under Section 80CCD(1b) of the Income Tax Act has increased the number of subscribers to this retirement plan. It has proven to be one of the best tax-saving investments, and has attracted contributions from the investor community.
Several individuals who want to take advantage of this best tax-saving investment product have started contributing to this plan.
Asset allocation
Subscribers may invest a maximum of 50% of their contributions in equities and the balance is divided between the other two asset categories. Investors have the option of either choosing the active investment mode, whereby they control the investing of their contributions. Alternatively, they may opt for auto allocation, which is often used by subscribers who do not possess the necessary knowledge to make the right decisions.
Choosing the auto allocation mode is not recommended for younger individuals. This is because the fund managers of this retirement plan in India reduce the equity exposure of the contributions. When a person is young, he or she could assume higher risks, which means they may enjoy greater returns by investing 50% of their annual contributions to equities. Choosing the right fund manager, who will align your investment with your financial objectives, will help you to maximise returns. This in turn will provide higher corpus accumulation and larger pensions during your retirement years.
Fund manager choice
Considered to be among the best retirement plans in India, the NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). The regulator provides subscribers with the choice of opting for one of the seven approved fund managers.
It is important to focus on certain criteria when selecting a fund manager. Subscribers must choose one who has a proven track record of at least 5 years. This will improve the possibility of earning higher returns, because such managers have a proven record of dealing appropriately with the various assets based on the economic situations and business cycles. Checking fund managers with a higher Compound Annual Growth Rate (CAGR) will help maximise your returns. Subscribers are recommended to choose a fund manager with a good performance in equities for the maximum returns.
Planning for the golden years requires proper and accurate strategizing. Choosing to use a reliable retirement planning calculator for this purpose is recommended. Moreover, NPS calculators are available on several websites. Using these instruments to determine your investment planning will be beneficial to ensure post-retirement financial stability.