How Has NPS Performed in Comparison with Other Instruments?

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How Has NPS Performed in Comparison with Other Instruments?

How Has NPS Performed in Comparison with Other Instruments?
  • 13th Jun 2022 |
  • 3,642

The desire for a financially secure and comfortable post-retirement life is what makes you invest your money in schemes that will help protect these dreams. That corpus serves as a critical backbone for those golden years of your life. This also introduces you to a host of financial plans, that are often surrounded by a calculated mix of expenditures and savings. With so many investment instruments around in the financial framework, it becomes challenging to choose the one that can deliver maximum value for your money.

While the National Pension System (NPS) is one of the most popular investment choices, there are various concerns and questions regarding it. In this article, we will compare NPS to other investment options so that you can make an informed decision that caters to all your requirements.

The Basics of National Pension Scheme

National Pension Scheme is a government-run social security programme. With the exception of military personnel, this pension scheme is available to all employees in the public, private, and unorganized sectors. As part of the system, employees are urged to contribute to a pension fund at regular intervals throughout their employment. Contributors can withdraw a fixed amount of money from the account when they retire. If you have an NPS account, you will get the leftover money as a monthly allowance once you retire.

Advantages of NPS

  • Diversification is one of the most important NPS plan advantages as it allows you to engage in both the equity and debt markets with a single transaction.
  • Section 80CCE (Sub-section of Section 80C) of the Finance Bill 2011-12, allows for a tax deduction on contributions made by an employer to an employee’s national pension programme (NPS) account of up to 10% of basic pay and dearness allowance (DA).
  • You can now apply for NPS accounts online at the most accredited banks. To apply for NPS, you must submit a completed registration form, evidence of address, proof of identification, and certificate of birth.

Disadvantages of NPS

  • There is some ambiguity regarding the withdrawal of taxes. Under current laws, about 60% of the corpus can be removed at maturity, while at least 40% must be utilized to purchase annuities and annuity insurance plan returns are currently not tax-free.
  • NPS portfolios are not allowed to contain more than 50% equity investment. For those in their 20s and early 30s, it means losing money since equity has demonstrated to provide 12-15% annual returns over extended periods of time.
  • You may modify your investment strategy between government securities, corporate bonds, and equities. However, the equity exposure is limited to a particular percentage. Many investors seeking better returns consider this to be a big disadvantage of NPS.
  • PPF vs NPS

    Public Provident Fund (PPF) has a holding period option that offers a marketable interest rate and investment returns. Under the Income Tax Act, the profits and returns received are not taxable. The maturity duration of a PPF account is 15 years. The risks are low because PPF invests completely in debt. Each quarter, the government sets the interest rate, which remains unchanged for that quarter. Returns from NPS, on the other hand, aren’t guaranteed and are subject to market factors.

    Mutual Funds vs NPS

    Mutual funds are a collection of many diverse investment options that create returns over a considerable length of time. AMCs engage experienced experts known as fund managers to meticulously handle the funds of clients and adjust allocations in response to market movements. Because of the flexibility (you have the option of withdrawing your funds) they provide, mutual funds are frequently used as emergency savings. As a result, it is recommended to invest in NPS if your objective is to retire with tax advantages and you have a low-risk appetite.

    ELSS vs NPS

    Equity Linked Savings Scheme (ELSS) is a form of diversified equity programme offered by mutual funds in India with a three-year lock-in period. Because ELSS is entirely equity-oriented, it is significantly riskier than NPS. The highest equity allotment in NPS is set at 75% and it enables you to invest in asset groups that are typically safe, such as corporate bonds and government securities.

    To summarise, while choosing an investment opportunity, you must ensure that you choose one that aligns well with your needs and risk appetite. Only after conducting a comprehensive research should you settle for an option!

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