The National Pension System (NPS) provides the necessary financial security and stability during one's old age when there won't be a regular source of income i.e. life after retirement. It gives individuals an opportunity to invest and accumulate savings, providing them with a lump sum and an annuity amount as regular income from an annuity service provider upon superannuation.
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It is recommended as a thumb rule that an individual subscriber under NPS may consider saving around 20-30 percent of their income for the golden years (retirement), said Amit Sinha, Group Head, Social Security and Welfare at Protean eGov Technologies Limited.
The exact amount that one will be required to invest will, however, depend on various factors, such as age, individual's risk appetite, corpus required at retirement and the rate of return on investments.
"There is no limit to investing under NPS in the two types of accounts — the pension account (tier-I) and the investment account (tier-II). If the individual falls under a tax bracket, they may consider pooling regular contributions under the NPS to avail tax benefits, even if they fall under the old or new tax regime. Furthermore, investment can also be done with the specific purpose of building a retirement corpus along with wealth creation," Sinha told CNBC-TV18.
A subscriber is required to make an initial contribution in NPS, where a minimum of Rs 500 is required for tier-I and a minimum of Rs 1,000 for tier-II at the time of registration.
NPS calculator
Going by the calculation, if a 25-year-old is investing Rs 10,000 monthly in NPS for the next 35 years (i.e., till the age of 60 years and assuming 10 percent return per annum), the total NPS investment will grow to Rs 3,82,82,768 at the time of maturity, Sinha said.
However, this may be just one calculation and investors may consider all factors before investing in the avenue.
So, are returns captivating enough?
The returns in NPS depend on the selection of the pension fund managers (PFMs), investment options, asset allocation, time horizon of investment and risk appetite, i.e., whether one is an aggressive or conservative investor and the period for which one shall remain invested under NPS.
"Pension fund managers (PFMs) under NPS are mandated to invest the subscriber's contribution as per prescribed guidelines and regulations by PFRDA. NPS has provided consistently good returns for the investors in the range of 9-12 percent under the tier –I equity asset class since inception," Sinha said.
Here's a look at the performance of different PFMs:
Pension Fund | InceptionDate | AUM(Rs crore) | Subscribers | NAV | Returns 1 Year | Returns Inception |
Aditya Birla Sun Life Pension Management Ltd. | 02-Sep-20 | 0.59 | 613 | 12.1961 | 10.48% | 7.55% |
Axis Pension Fund Management Limited | 21-Oct-22 | 0.09 | 140 | 10.3384 | NA | 3.38% |
HDFC Pension Management Co. Ltd. | 03-Sep-20 | 4.26 | 2,416 | 11.6202 | 11.47% | 5.66% |
ICICI Pru. Pension Fund Mgmt Co. Ltd. | 04-Sep-20 | 1.22 | 1,361 | 11.6848 | 10.88% | 5.88% |
Kotak Mahindra Pension Fund Ltd. | 04-Sep-20 | 0.57 | 584 | 12.0466 | 10.49% | 7.08% |
LIC Pension Fund Ltd. | 04-Sep-20 | 1.55 | 1,485 | 11.9782 | 10.78% | 6.85% |
Max Life Pension Fund Management Limited | 12-Sep-22 | 0.02 | 49 | 10.3938 | NA | 3.94% |
SBI Pension Funds Pvt. Ltd | 04-Sep-20 | 3.97 | 2,564 | 11.1663 | 8.23% | 4.13% |
Tata Pension Management Ltd. | 19-Aug-22 | 0.25 | 261 | 10.4878 | NA | 4.88% |
UTI Retirement Solutions Ltd. | 04-Sep-20 | 0.91 | 1,214 | 11.5016 | 10.30% | 5.27% |
(Returns as on May 26, 2023, Source: NPS Trust website)
Is it right to invest in NPS now and how can one decide the allocations?
NPS is a financial product that is tightly regulated by PFRDA. Hence, it is safe to invest in it. The pension funds are managed professionally and transparently, thereby providing investors with the necessary assurance that their money is safe.
"Allocation can be decided by considering various factors, such as the individual's risk appetite and future requirements. The key to building a good corpus is early investment, particularly at a young age. Compounding is often referred to as the eighth wonder of the world, and the same principle applies to investments in NPS. Therefore, the earlier the investment, the better the compounding effect on the amount invested under NPS," Sinha told CNBC-TV18.com.
Under NPS, there are multiple PFMs, investment options (auto or active) and four asset classes i.e. equity, corporate debt, government bonds and alternative investment funds.
The individual subscriber will have to select the PFM, and after selecting the PFM, the subscriber will have the option to choose one of the investment options. The subscriber can select the fund manager once a year and change the scheme preference up to four times in a financial year.
But, can only investing in NPS help in building a retirement corpus?
NPS does assist in building a good retirement corpus.
"Investing for 30-35 years can yield good returns on investment. Additionally, NPS offers tax benefits, flexible contribution options, investment options, low cost, flexible annuity options, and safety. So, it's an ideal investment option for people looking to save money for retirement and secure their financial future," Sinha said.
However, experts say it's always better to have diversification when investing, which is also the case for retirement planning.
