While broader financial markets have fallen by nearly 15 percent since its peak in October last year, financial experts say the market correction may continue for some time as the bearish sentiment looms on the horizon.
In this backdrop, retail investors are on a lookout for investment options that can facilitate higher returns. The available investment options which they can avail include hybrid mutual funds, debt funds, government & corporate bonds, fixed deposits and pension funds such as National Pension System i.e., NPS.
The NPS enables retail investors to not only increase their returns but to also save income tax by seeking tax deduction.
One of the most income tax exemptions are available under section 80C of the income tax with a total exemption cap of ₹1.5 lakh.
However, National Pension System enables investors to save an extra ₹50,000 under tax saving under section 80CCD (1B). This deduction is over and above of ₹1.5 lakh under section 80C of the Income-Tax Act.
But investors must apprise themselves that this deduction is allowed only under NPS Tier I account.
High returns
Along with tax saving, these fund schemes also allow investors to earn on their investment corpus. These returns vary on the basis of which pension fund manager you have chosen.
Although the past one-year returns were quite low, but in the long-term the returns have been promising, particularly in the past three and five years.
As we can see in the chart below, returns given by equity schemes of NPS in past one year hover around one percent for different pension fund managers. However, for past three years, returns range between 10 to 11.7 percent.
(Source: NPS Trust)
NPS funds are invested across asset classes based on which investment option you have chosen. The overall returns are a function of all the returns put together across asset classes which include government securities, corporate bonds and alternative assets.
Here we reproduce the returns of investment in corporate bonds in different asset classes.
| Pension fund manager | One-year return on debentures |
| SBI PF | 1.49% |
| LIC PF | 1.55% |
| UTI Retirement Solutions | 1.56% |
| ICICI PF | 2.15% |
| Kotak PF | 1.76% |
| HDFC PF | 2.36% |
| Birla PF | 2.50% |
(Source: NPSTrust.org.in)
Some experts argue that NPS is a good investment scheme, particularly for conservative investors who want to get long-term equity exposure without taking too much of risk.
Salonee Sanghvi, CFA, Founder, My Wealth Guide says, “NPS allows you flexibility to choose the proportion of equity & debt depending on the amount of risk you want to take. Given its long-term nature, it also forces investors to stay invested for a longer period of time than switching in and out. For conservative investors it is especially useful to get some equity exposure without taking an inordinate amount of risk. But the money is locked-in and even after retirement the entire amount cannot be withdrawn.”
S. Sridharan, founder and principal officer, Wealth Ladder Direct makes an argument against NPS. He says, “Investment flexibility in Tier II can be availed by investors only when they have Tier-I account from which they can’t withdraw their investments. Those who want to invest in secured investment should, instead, explore five-year government securities which also offer taxation benefits.”
