The National Pension System (NPS) 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.
The National Pension System (NPS) aims to instil in residents the habit of saving for retirement. It 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.
Subscribers may use the accumulated pension wealth under the scheme to acquire a life annuity from a PFRDA-approved life insurance company, as well as withdraw a portion of the accumulated pension wealth as a lump sum if they wish, at the time of their exit from the programme.
However, there are certain things one should keep in mind while investing in NPS.
Option to choose between auto and active choices
Active choice allows investors to allocate their assets to specific asset classes such as equity funds, government debt funds, and corporate debt funds.
However, under the auto choice option, an investor can choose amongst three lifecycle funds: aggressive, moderate, and conservative. The allocation to various asset classes is predefined and adjusted based on the investor’s age, ensuring that by the time he retires, he has the least amount of exposure to stocks.
It is essential to select the appropriate fund manager
An investor selects a fund manager and asset allocations after making an active choice. Because the same fund manager will manage your whole portfolio across all asset classes, selecting the right fund manager is crucial in this process. If you are unhappy with the performance, you have the option to change the fund manager once a year.
For example, If UT Retirement Solutions Limited is chosen as your fund manager, your assets will be managed by them across all asset classes, including equity and corporate debt. You will not be able to choose a different fund manager for each asset type. As a result, the performance of the asset to which you have the greatest allocation should be given greater weight.
Analyse the rolling returns
Rolling returns refers to a scheme’s annualised returns over a given time period. They are the most accurate measure of a fund’s performance. Unlike trailing returns, which are subject to blind optimism, and point-to-point returns, which are period-specific, rolling returns objectively reflect a fund’s absolute and relative performance across all timescales.
Assess the allocation
Examine the allocation to large cap, mid cap, and small cap equities in a portfolio of equity funds to assess risk. Large-cap equities are the focus of the bulk of NPS equity funds.
Previously, the NPS plan only applied to employees of the Union government. The PFRDA has now made it available to all Indian people on a voluntary basis. For anyone who works in the private sector and needs a monthly pension after retirement, the NPS system can be explored.
With tax incentives under Section 80C and Section 80CCD, the plan is portable across occupations and places. Therefore, it is a wise step to invest in NPS, albeit after some research and evaluation.