Is it wise to rely on equity to save for retirement?

Investing to create a pension corpus via secure financial products such as NPS (National Pension System) and PPF (Public Provident Fund) is undoubtedly safe, but may not necessarily be too rewarding. Consequently, market aficionados tend to believe that it can tantamount to losing big on opportunity that equity offers.

Sample this. Sensex and Nifty gave returns to the tune of 22 and 24 percent in 2021, respectively, in comparison to the single-digit returns offered by most fixed income instruments such as PPF and NPS. 

And those investors who want to strike a balance between high returns and safety are advised to hedge some part of their investments via fixed income instruments. 

It is an old maxim that not taking a risk could be a risk in itself. “Investors should consider benefiting from the investment opportunities like equities which are rewarding in the long term. Diversification across different kinds of investments is a proven strategy of managing risk,” says Rachana Baid, Professor and Head of department, School of Securities Education, National Institute of Securities Markets.

At the same time, some advisors believe that the market has several sophisticated financial products that can address your specific needs. Even the small investors who are too sceptical to take a massive bet on equity can choose a flexible financial instrument such as a balanced advantage fund. 

Amol Joshi, Founder of Plan Rupee Investment Services says, “Dynamic Asset Allocation Funds or Balanced Advantage Funds invest in a mix of debt and equity depending on the market movements. So, if the equity prices heat up too much, it pulls the trigger and moves a portion of equity to debt.”

Here, we give the lowdown on an array of options which small investors have for creating their retirement corpus. 

Public Provident Fund: The PPF is a government-backed savings vehicle with quarterly fixed returns determined by the government. It isn’t just for pensions or retirement; it can also be utilised for other things. The PPF has a set rate of return. Every quarter, the exact rate is determined. In the past, rates have fluctuated around seven per cent per year

Returns given by PPF in past two years:

National Pension System (NPS): It is a voluntary, defined contribution retirement savings plan that enables subscribers to make the best decisions for their future by saving consistently throughout their working lives. It aims to instill a habit of saving for retirement. NPS is an attempt to discover a long-term solution to the challenge of providing sufficient retirement income to all Indian citizens.

Individual deposits are pooled into a pension fund, which is then invested by PFRDA-regulated professional fund managers in diverse portfolios of government bonds, bills, corporate debentures, and shares, according to authorised investment criteria. Depending on the profits on the investment, these contributions would grow and accrue over time.

Returns given by NPS Trust in past one year:

(Note: Returns relate to NPS Scheme A-Tier 1, Source: NPS Trust)

Another option for small investors is to take a Unit Linked Insurance Plans.

United linked Insurance Plan (ULIPs): They are a combination of insurance plans and investments. The key goal of a ULIP is to give an opportunity for growth of wealth besides insurance coverage. The premium which the investors pay comprises two parts. The first one goes towards the insurance premium, and the remaining towards investment. The investment is made in equity or debt, according to investor’s risk profile.

Some of the popular ULIP providers In India are LIC, HDFC Life, Max Life insurance, SBI Life, Bajaj Allianz, Exide Life and ICICI Prudential.